Money expert Clark Howard loves online banks. Since they don’t operate physical locations, they often pass along those savings to customers in the form of higher interest rates and fewer “gotcha” fees.
But what about mortgages with online banks? Does Clark think online-only financial institutions offer a superior product when it comes to home lending as well?
That’s what a listener of the Clark Howard Podcast recently asked.
Should I Get a Mortgage Through an Online Bank?
I know you recommend Ally Bank as one of the best online-only banks. Should I also feel comfortable applying for a mortgage with them?
That’s what a Clark listener asked on the Aug. 16 podcast episode.
Asked PlainJane in Georgia: “Clark, I heard you recommend Ally Bank a few years ago. As a result, I opened a savings account there. I like interacting with Ally.
“I’m considering buying a new home and want to get prequalified so I can jump on something. What is your opinion on using Ally for that? My credit score is over 800 if that makes a difference as to who I should choose.”
Surprisingly, Clark isn’t a big fan of going through an online bank for a mortgage.
“If you’re buying a home, I don’t want you doing a mortgage with anybody who’s remote like that like Ally [unless] you’re refinancing,” Clark says.
“When you’re buying a home, there’s always complications. Always. And that’s why I want you with a mortgage broker who is there to be able to shop with multiple lenders. Who is able to massage problems that may occur through the process.
“I want you with a person, not an 800 number.”
What Is a Mortgage Broker?
A mortgage broker is a salesperson who shops your mortgage application to multiple lenders.
He or she can pitch your loan and market you as a buyer.
The average rate for a 15-year fixed mortgage is 6.79% right now vs. 7.58% for a 30-year fixed mortgage. Less than two years ago, getting rates under 3% was common, especially for people with great credit scores.
You’ll likely be able to refinance at some point. But it’s impossible to know when or if the Fed will cut interest rates in the next few years.
So comparison shopping and getting the best possible deal now on any new mortgage is essential.
Get a referral for a mortgage broker from your real estate agent, from friends or from family, Clark says.
Mortgage brokers typically command between 0.5% to 2.75% of the loan principal according to Bankrate.
Even if you don’t hire a mortgage broker, it’s important to get quotes from multiple lenders. Clark recommends local credit unions in addition to mortgage brokers.
Credit Score Still Matters for Mortgage Rates
Other than comparison shopping your mortgage, and doing your homework, boasting a great credit score is the next-best thing.
That’s an ace in the hole for PlainJane.
“That’s quite a deal that you’re above 800. That’s rarified air. What they call in the credit world — it means you’re golden,” Clark says.
Despite Clark’s love of online banks in general, when it comes to mortgages, he wants you to focus on other options. Specifically, Clark recommends working with a mortgage broker or local credit unions over online banks.
Regardless, you should put real time into comparison shopping and exploring all your options.
It’s not a bad idea to get a quote from your main bank, whether that’s an online bank such as Ally Bank or another option. Just make sure your search is more extensive than that if you want the best possible rate and the best possible experience.