When in the market for a new home, or when it's time to refinance, which is better - an online mortgage lender or the local bank? There was a time, not too long ago, that the only choice a borrower had was to visit their local bank and apply for their mortgage loan in person. In the last several years, more people have opted for an online mortgage lender, but is this a better choice than the local bank?

To discover which one is best for you, let us take a look at the advantages and disadvantages of each.

Online Mortgage Lender

Shopping for a lender online may seem like a scary prospect, but understanding a few basic facts will make you feel much more comfortable. When exploring the website in your search, be sure to look for a physical address and telephone number where you can contact a live human. Do not fill out an online application which asks for your Social Security number. Although you will eventually be providing this information to your online lender, you will want to make sure you are comfortable with the person on the other end of the internet connection or phone line before you do. Websites that advertise that they will let the lenders compete to get your business are actually lead providers that sell your contact information to multiple brokers. The idea that several lenders will be bidding for your loan is only true in the advertisements, it is not reality.

Online mortgage lenders do however have access to hundreds of bank mortgage loan products to choose from. This is a huge advantage to you, the borrower, because you benefit from shopping at hundreds of banks while only working with one point of contact. It is like driving to every bank in the country and asking the bank officer to show you the bank's best loan products. The rates available to you online will usually be the same as the local bank, and many times they are even better online. An online mortgage lender or broker will generally charge the same origination fee as the local bank, so the cost for you should be the same online as at your bank. You should never feel like another number in the system, but should be treated with respect and have all of your questions answered to your satisfaction. Do not feel obligated to continue to work with any loan officer who makes you uncomfortable in any way.

Local Bank

Do not confuse the big box national banks with smaller locally owned banks. The big box banks are the ones with branches throughout the state, or even throughout the country. Locally owned banks as a rule only have branches in and around the city, usually do not have branches in other cities, and especially not in other states. The national banks originate a huge number of mortgage loans due to their size and number of locations. In addition to offering their loans to their regular banking customers, big banks market their loan products in the wholesale market. This means that they market their loans to the consumer through brokers, many of whom are online.

In either case, they sell a great majority of their loan portfolio to the secondary market and do not hold onto the mortgage for the entire term of the loan. In a nutshell, this means that they bundle a large group of mortgages together into many millions of dollars worth of mortgages and sell them to Wall Street investors at a discount and keep the difference as a profit. Once the group of mortgages has been sold, the bank takes the money from the sale and loans it out again, starting the cycle all over again. Because they will be selling the loans, the big banks must keep the group of loans as clean and conservative as possible to make them marketable to Wall Street investors, which tends to limit their flexibility in underwriting.

Locally owned banks certainly can and do sell some of their loans also, but in many cases they will keep the loans all the way through to maturity. Because they do not have to be as concerned about making their loans sellable to Wall Street, they have the ability to be a bit more flexible when underwriting their loans. The bank may have decided to market to certain niche markets which the big banks are not comfortable working with. Some of the common niche markets are first time home buyers, small business owners, or individuals looking to purchase investment property.

For borrowers who play golf with the bank president, have longstanding banking relationships with a local bank, or who have a considerable amount of money on deposit, the local bank may be the first place to start when shopping for a mortgage loan. For the rest of us, the best bet is to go online and find an online mortgage lender you are comfortable with and let them do the work for you.

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