Saturday, 31 October 2020

The Pros and Cons of a Credit Union Mortgage

The Pros and Cons of a Credit Union Mortgage
26 Jun
9:48

co-op shared branching for credit unions

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Though banks are better known, their not-for-profit cousins known as credit unions still command a significant chunk of the mortgage market. During the first quarter of 2019, credit unions originated 8% of mortgages in the United States, according to credit union consulting firm Callahan & Associates.

Often overlooked, credit unions can be a good option when shopping for a mortgage. Joining a credit union can make it possible for you to reap benefits such as lower origination fees or a more competitive interest rate.

This article will explore whether homebuyers might get a better deal from a credit union mortgage and the implications a relationship with a credit union might bring.

How is a credit union different from a bank?

Although credit unions fall under the umbrella of financial institutions, they differ from commercial banks in several key ways.

Banks are typically owned by their shareholders, credit unions are not-for-profit organizations owned by their members. This often translates to better rates and terms on their financial products.

While banks can serve the entire nation, credit unions tend to be community-based institutions that play a significant role in serving people in a local area.

“Credit unions are a really important part of the financial services fabric,” said Barry Zigas, director of housing policy at the Consumer Federation of America in Washington, D.C.

On the other hand, credit unions typically don’t offer the same suite of products that a larger bank is often known for. While you can take advantage of a checking, savings or individual retirement account, for example, you may find it challenging to access financial planning or investment services.

Below we highlight how credit unions stack up against banks.

Credit Union Commercial Bank
  • Not-for-profit organization
  • Member-owned
  • Typically have higher yields on deposit accounts
  • Typically have lower interest rates on credit and loan products
  • Membership is based on an affiliation or geographical location
  • Smaller branch and ATM networks
  • Federally insured up to $250,000 through the National Credit Union Administration
  • For-profit organization
  • Shareholder-owned
  • Yields are usually lower on deposit accounts
  • Interest rates on credit and loan products are usually higher
  • Anyone can establish a relationship with a bank
  • Larger branch and ATM networks
  • Federally insured up to $250,000 through the Federal Deposit Insurance Corp.

Getting a mortgage from a credit union

One of the main differences when applying for a mortgage through a credit union rather than a traditional bank is that you must be a member of the credit union before you can attempt to borrow money.

Credit union customers own “shares” in the institution, typically via a $5 deposit held in a particular savings account.

In order to become a member, you must meet the membership requirements outlined by the credit union you’re interested in joining. Credit union members have a common bond, which could be any of the following, according to the National Credit Union Administration:

  • An employer.
  • A geographical location where those interested in joining live, work, worship or attend school.
  • A group membership, such as a homeowners association or labor union.

Family members of credit union customers are also often eligible to join.

One of the key reasons for choosing a credit union: You may be able to save money on lender fees, said Bruce McClary, vice president of communications at the National Foundation for Credit Counseling. A credit union may also be more flexible with credit score requirements than a bank and may offer lower mortgage interest rates.

However, since credit unions are small organizations, there’s the risk that your credit union’s name or ownership could change. Your credit union could also sell the rights to service your mortgage to a third party, which may impact your customer service after your loan closes.

“Even though you may be saving money on origination fees and you may not be paying as many other fees with your mortgage — so it might be more affordable at the onset — you may end up having to deal with a servicer that you weren’t dealing with before, rather than dealing with your credit union,” McClary said.

It’s important to note that bank-originated mortgages can also be sold and handed over to other servicers, so this issue isn’t unique to credit unions.

Still, developing a relationship with a credit union over time — as in, the organization’s representatives are very familiar with you and your finances — could work in your favor when you decide to apply for a mortgage, McClary said.

“Being a member of the credit union might actually put you in an advantage in terms of approval or maybe in terms of negotiating terms of the mortgage in the application process,” he said.

Pros and cons of a credit union mortgage

Consider the following benefits and drawbacks of a credit union mortgage before you choose this type of lender for your home purchase.

Pros

  • Potentially lower origination fees and other lending costs.
  • Mortgage rates may be lower.
  • A greater sense of community, since the institution is member-owned.
  • Potential for more negotiating room during the mortgage lending process.
  • Shared branching benefits, which allow you to use the services of an outside credit union.

Cons

  • You must meet eligibility guidelines to join the credit union and become a member before applying for a mortgage.
  • Credit unions typically have smaller branch networks.
  • There’s the risk of your credit union closing, switching owners or going through some other changes, which can affect how your mortgage is serviced.
  • Typically carry fewer product offerings than traditional banks.
  • May have limited online banking capabilities.

The bottom line

A traditional bank isn’t your only option for getting a mortgage. Depending on what your lending needs are and how much you value building a relationship with your financial institution, a credit union might be right for you.

However, if you’re concerned about mortgage servicing, be sure to check with your credit union for more information about how they plan to handle your mortgage once it’s originated.

“I think consumers who are members of credit unions should certainly go to their credit union and find out what their loan terms are, what the application process is like and maybe even ask, ‘Are these loans that you hold or are these loans that you sell off?’” Zigas said.

Zigas also recommended practicing that same due diligence with other types of mortgage lenders and shopping around.

“It’s a very competitive environment, and there’s no assurance that your credit union will actually be offering you the best possible rate,” he said.

It pays to comparison shop before you settle on a particular mortgage lender. For example, if you were looking to buy a house that required a $300,000 mortgage, you could potentially save more than $42,000 in interest over the life of a 30-year term by shopping for the best rate, according to data from LendingTree’s latest Mortgage Rate Competition Index.

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Source: https://www.magnifymoney.com/blog/mortgage/the-pros-and-cons-of-a-credit-union-mortgage/

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