If you're shopping around for a mortgage, don't overlook credit
unions - even if you don't belong to one.
Credit union mortgage rates can be very competitive, on par with
and even lower than major banks. And because credit unions
typically don't pile on lots of "junk fees" to their closing costs,
the actual cost of borrowing is often lower than it would appear
from just their posted mortgage rate.
More mortgage borrowers turning to CUs
Although an extremely popular source for low-cost car loans,
credit unions have historically taken only a small part of the
mortgage market. That's begun to change in recent years, with
credit unions nearly doubling their market share of mortgage
applications since 2007.
In fact, the UW Credit Union was the number one provider of
mortgage loans for the Madison, Wis. in 2010, according to the
Federal Financial Institutions Examination Council, which appears
to be the first time a credit union has been the major source of
home loans in a major U.S. metropolitan area.
Tighter lending standards now normal
Why the increase? For one thing, credit unions have money to
lend. Because they're not motivated by maximizing profits, they
didn't go chasing after the type of risky loans that got other
lenders in trouble when the subprime mortgage market collapsed.
That also meant they got a relatively small slice of the market
during the housing bubble - but now that other lenders have become
more conservative with their own lending standards, credit unions
are right in the mainstream and getting a bigger share of the
market as a result.
Don't be fooled by advertised rates
Many borrowers are put off by credit union's listed rates for
mortgages, which often run higher than those advertised by other
lenders. But advertised rates are often misleading - they may
include discount points or high origination fees that boost the
actual cost of the loan.
Credit unions' listed rates tend to be straightforward - no
points and minimal fees. If you compare annual percentage rates
(APR), which account for "hidden" costs on a loan, you may find the
credit union's rate is a better deal.
Credit unions can offer attractive rates because they have low
operating costs. They don't have to produce profits for investors -
whatever they earn is returned to their members in the form of
higher returns on savings or lower rates on loans. Many borrowers
also like the level of service they offer - because they tend to be
relatively small, it's usually easy to reach someone with the
authority to resolve any problems you may have with your loan.
The local angle
Like small local banks in general, credit unions tend to be more
flexible than large lenders are. Most lenders tend to have a
certain number of mortgage programs with very specific underwriting
standards. If your loan application falls outside those guidelines,
you're out of luck.
Because credit unions tend to be closely associated with the
communities they serve, they're familiar with their local housing
markets and economies, and can recognize good lending risks that
may not fit the standard mold of the big banks - for example, a
unique property that's atypical for the neighborhood it's in.
Credit unions are also more likely to hold onto and service
their own loans - that is, they earn their money off the interest,
rather than collecting the origination fees off the top and selling
the loan to investors, as most lenders do. Once your loan is sold,
you have no control over who your mortgage servicer is - and have
limited leverage in dispute over billing or other matters. Many
borrowers feel credit unions (or small banks) offer more
accountability than a large corporation does.
Becoming a member
Of course, to get a mortgage through a credit union, you have to
be a member of one. Fortunately, that's very easy these days.
Although some still require that you or a family member have a
connection to a certain employer, university, trade union or other
group, many are simply based on geography - you can qualify simply
by living in a certain county. The Credit Union National
Association and affiliated state groups operate a credit union
finder at http://www.findacreditunion.com.
Membership is inexpensive - often, all you have to do is keep at
least $5 in a savings account. In addition, many of the
disadvantages of credit unions - in particular, limited access to
ATMs or branches where you can do business - have been overcome by
technology and partnership agreements that enable members to do
most banking services nearly anywhere.
A credit union may or may not be able to offer you the best
terms you can find on a mortgage - but they're definitely worth
checking into when shopping for a home loan.