When you shop for a mortgage, you have many places you can shop, such as mortgage lenders, savings & loan institutions and commercial banks. The name commercial banks may make you think that they don’t offer mortgages, but they do, along with a large variety of other services.
What is a Commercial Bank?
You probably have numerous commercial banks near you – it’s your standard local bank. Think of banks like Wells Fargo and Chase – those are your commercial banks. They offer a variety of services including checking, savings, CDs, personal loans, and mortgages. Each bank has its own offerings, but a majority of them offer mortgages for primary residences, second homes, and investment homes. Many also offer home equity loans.
In fact, a large part of a commercial bank’s income comes from mortgages. Banks earn interest income on the money you borrow. Some banks only offer a few select loans or mortgages, while others have a large offering.
Commercial banks get the capital to make loans from the deposits they receive from customers. That’s why they offer deposit services including checking, savings, and CD products. Banks offer larger interest rates to the consumers that carry higher balances or commit to keeping their money in an account for the long term (CD’s).
The Types of Mortgages Commercial Banks Offer
Banks typically offer standard mortgage loans with fixed rates and terms. Banks always require collateral (your home) and they often provide variable interest rate loans or prepayment penalties. While banks don’t want you to pay your loan back early, they do allow it.
Expect to find stricter lending requirements with a commercial bank that you would a mortgage lender. Commercial banks only offer mortgages to those with great credit and low debt ratios. They typically base your interest rate on your risk of default. The lower your credit score or the higher your debt ratio is, the more likely you are to default on the loan. If a bank does approve you, it will likely be at a higher interest rate.
Banks do prefer secured loans, such as a mortgage, as they have the collateral to default on should you stop making your payments. While the last thing a bank wants is to take your home and have it on their books, they will do so if you don’t keep up with your payments.
How Commercial Banks Make Money
You may wonder how a bank makes any money when writing mortgages. Here’s how it works:
Banks charge higher interest rates than they pay on their deposit accounts. If you’ve gotten a savings account or interest-bearing checking account lately, you know how low those interest rates can be. Banks charge a higher rate than they pay you on the mortgages that they write. The bank pockets the difference between the interest they promised you for depositing your funds and the interest they earn from a mortgage borrower.
Commercial banks also earn income from the fees they charge. Both depositing customers and loan customers pay fees. Depositing customers often pay monthly fees to hold an account. Many have a monthly service fee unless you carry a specific amount in the account each month. The bank also charges mortgage customers a variety of fees:
- Origination fees at the onset of the loan
- Discount points at the onset of the loan
- Underwriting/process fees at the onset of the loan
- Late fees if you make the payment past your grace period
- Prepayment penalties if you prepay your mortgage (only in some cases)
The loan you get from a commercial bank could be similar to one you could get from a mortgage lender. As is the case with any mortgage, compare the terms side-by-side. Look at the total cost of the loan at the closing as well as over the life of the loan. Don’t focus on the interest rate alone – ask about the bottom line figure. What will the loan cost you in the end? Use this number to make your decision – especially if you plan to stay in the home for the long-term. If this is a temporary home for you, the bottom line won’t matter as much and you can focus on the interest rate and minimizing your monthly costs.Click to See the Latest Mortgage Rates»