Credit union vs. bank mortgage: How to choose

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What do you prioritize most?

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What do you prioritize most?

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Getting a mortgage might be the biggest debt you incur in your lifetime. So, it’s important to work with the right lender to make sure you get the best terms for your home purchase. Banks and credit unions both offer mortgages, but which is better?

Let’s review the similarities and differences between bank and credit union mortgages, as well as compare the pros and cons of each.


Key insights

  • Both banks and credit unions offer fixed-rate and adjustable-rate mortgages.
  • Credit unions often have lower fees and interest rates than banks.
  • Banks typically have a wider variety of mortgage options than credit unions.

Understanding credit unions vs. banks

Banks are financial institutions that offer a variety of services, including banking, loans, credit cards and investment products. Banks are for-profit businesses that generate a profit from their fees, interest income and deposits. As such, banks often charge higher fees and interest rates for mortgage loans.

Credit unions also offer a variety of services, including checking accounts, savings accounts, loans and other products. But credit unions are not-for-profit financial institutions, which means any profit generated is given back to credit union members in the form of lower fees and rates on loans, as well as higher interest rates on savings accounts.

Credit unions require membership to use their services. This typically means you have to be part of a certain community or be employed by a specific business to participate. There are some national credit unions that are open to any U.S. citizen, but most credit unions are regional financial institutions that have some prerequisites for joining.

Credit unions may also require that you have an active checking or savings account with them to be able to apply for a mortgage, while most banks don’t.

Credit unions vs. banks: Which is better for a mortgage?

David A. Krebs, the principal broker at DAK Mortgage in Miami, believes that both credit unions and banks have their place, and choosing one or the other for your mortgage is a matter of personal preference.

“Choosing between a credit union and a bank often comes down to personal preference and individual financial situations,” said Krebs. “Credit unions tend to offer lower rates and fees due to their not-for-profit model, but banks often have more diverse product offerings and technological conveniences. It's essential to shop around, compare rates, fees and terms and consider factors like customer service and accessibility.”

» MORE: 9 mortgage questions to ask your lender

Pros and cons of credit union mortgages

While credit unions offer reduced fees, the trade-off is often more limited service. Consider these pros and cons before taking out a mortgage with a credit union.

Pros

  • Lower interest rates and fees: Because credit unions are not-for-profit institutions, they can offer lower interest rates and smaller origination fees for mortgages.
  • Personalized customer service: Credit unions are typically smaller and, because they are regional, tend to provide a more personalized approach.
  • Personalized approval: Since credit unions have closer relationships with their customers, they may be more open to manual underwriting to consider your situation. Big-volume banks are more likely to use automated underwriting.

Cons

  • Membership required: Credit unions require membership to apply for a mortgage, while banks typically don’t.
  • Limited branches and services: Credit unions typically have fewer branches for in-person banking. And while they do offer standard mortgages, they may have fewer mortgage options overall than can be found at a larger national bank.
  • Limited app functionality: Many credit unions don’t have banking apps or have apps with limited functionality. You might need to log into your account via a desktop computer or visit a branch in person to receive some services.

Pros and cons of bank mortgages

Banks may offer more variety, tech and access, but they’re less personalized and come with higher fees. Consider these pros and cons before taking out a mortgage with a bank.

Pros

  • Wide range of mortgage options: Banks typically have more options, including conventional and government-backed mortgages, as well as flexible options like bank statement loans or other custom loans.
  • Convenient access: Larger banks usually have more branches nationwide. This is important if you value in-person banking and the ability to drop off a mortgage payment at any location.
  • Up-to-date apps: Most national banks have user-friendly apps that allow you to see all of your finances in one place.

Cons

  • Higher rates and fees: Since banks are for-profit institutions, they typically charge higher fees and mortgage interest rates than credit unions. This is how they make a profit for their shareholders.
  • Less personalized services: Banks are all about volume, and the more loans they can sell, the more profit they make. High-volume lending may lead to a more impersonal lender-borrower relationship.
  • Your loan might be sold: Banks are more likely to sell off your loan to raise capital for more loans. While your rate and terms won’t change if a bank sells your loan, you’ll have to deal with a new loan servicer, and it can be frustrating to set up payments with another company.

Factors to consider when choosing a mortgage lender

When borrowing hundreds of thousands of dollars, it’s important to choose your mortgage lender wisely. Here are a few things to consider when looking to purchase a home:

  • Interest rates and fees: Mortgage fees can put a huge dent in your wallet, so finding a lender with reasonable fees can save you thousands. Even getting a 0.25% lower interest rate on a 30-year mortgage can save you tens of thousands of dollars over the life of the loan.
  • Loan terms: Make sure your lender explains (in detail) all of the terms of your loan, including how payments work, if the interest rate is fixed or variable and how amortization works.
  • Loan eligibility: Before applying for a loan, know what the minimum requirements are for your lender. Make sure you know what the income, credit score and other financial requirements are before the lender pulls your credit report.
  • Customer service: If your lender typically sells off mortgages to another company, it’s good to know this upfront. If you want your loan to be serviced by the financial institution that originated it, you might consider working with a credit union over a bank.

» MORE: How to get preapproved for a mortgage

FAQ

Is it easier to get a mortgage with your own bank/credit union?

While it might feel easier to simply get a mortgage with your own bank or credit union, it might not actually be any easier. You still need to submit a complete application with your personal and financial information, and most banks won’t just auto-populate your information into a mortgage application. While you can ask your local bank for discounts or other incentives, it’s best to shop around to find the best rates and terms.

Are big banks safer than credit unions?

Both big banks and credit unions are protected by the federal government (the Federal Deposit Insurance Corporation for banks and the National Credit Union Administration for credit unions), so neither one is necessarily “safer” than the other. Even if a bank or credit union fails, there are processes in place to give depositors access to their funds within days, and existing loans will be passed onto another financial institution.

Do both banks and credit unions offer nonconforming loans?

Yes, both banks and credit unions can offer nonconforming loans, such as jumbo loans. Banks typically have more offerings than credit unions, but it’s best to check with both to find a loan that works with your specific financial situation.

Do credit unions offer home equity loans?

Yes, credit unions can offer home equity loans. A home equity loan allows you to borrow against the equity in your home to be used for home improvements or other purposes. Credit unions usually offer lower interest rates than banks for home equity loans and home equity lines of credit (HELOCs).

Bottom line

Both credit unions and banks offer a variety of mortgage types for homebuyers and those looking to refinance their mortgage. Banks typically have more offerings available, while credit unions will usually have lower interest rates and fees.

No matter which lender you choose, it’s important to compare multiple offers to find one that best fits your financial situation and saves you money.


Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. MyCreditUnion.gov, " What Is A Credit Union? " Accessed June 20, 2023.
  2. Mortgage Calculator, " Mortgage Calculator ." Accessed June 20, 2023.
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