What’s the difference between getting a mortgage loan at your bank vs. a credit union?
The best way to find out is to compare the primary features of a home mortgage on which banks and credit unions compete.
These categories are: branch availability, rates, fees, product array, underwriting (whether the bank feels the risk in making you a loan is acceptable), solvency (the fiscal soundness of financial institution making you the loan), turnaround speed, and overall service.
What are credit unions?
Credit unions are hardly new. In fact, they’ve been around since the early 1900s, but they’re now an emerging force in the home loan market.
Credit unions are “not-for-profit” institutions that are controlled by their owner-members. “Not-for-profit” is different from a “nonprofit” or charity. A credit union is not a charity, it’s supposed to make money, but its primary purpose is to serve members, not maximize profits. Banks, by contrast, are strictly “for-profit” institutions, driven to maximize profits for its shareholders.
Membership in a credit union is usually tied to an organization or association you’re already a part of, such as a church or a trade or industry group. If you don’t have a credit union at work, there’s likely one in your community. To become an owner-member, simply open a savings account or checking account (credit unions call them share accounts and share draft accounts) at one, and you’re good to go. As a member, you get to elect your credit union’s board of directors in a one-person-one-vote system, regardless of how much money you have on account.
Now you know what a credit union is, let’s see how it stacks up against a traditional bank lender in helping you obtain a mortgage:
Advantages of branch network
The totals might surprise you, but the number of banks and credit unions in the United States are roughly the same. According to the FDIC, there were 6,799 FDIC-insured commercial banks in the United States as of February 2014. That compares with 6,557 credit unions that the Credit Union National Assn. (CUNA) reported in June of this year.
That said, while you see bank advertising everywhere, credit union advertising is virtually non-existent, at least at a national branding level. In many towns and cities across the country, bank branches take up prime corner real estate locations, not so for budget-conscious credit unions.
Then, there’s the fact that despite how incredibly easy it is to join a credit union, you still have to join one.
Winner (for branch network): Big banks
For my money, I still love the ubiquity of big banks. Bank of America, Wells Fargo, Citibank, Chase, these are household names. I defy you to rattle off the names of three credit unions as quickly.
There’s little difference between the interest rates that banks and credit unions charge. That’s because after you strip away the fancy names that financial institutions give their home loan products, mortgages are simply commodities, little different from table salt or gasoline. For example, you may pay a few more pennies at the pump per gallon depending on whether you use Shell or Mobile, but the difference won’t be great. Same goes for home mortgage interest rates.
Also, because both credit unions and banks sell loans to government-backed mortgage enterprises Freddie Mac and Fannie Mae, which bundle (securitize) them and sell them to investors, bank and credit union mortgages have to fall in line with Freddie and Fannie standards.
Lastly, banks and credit unions aren’t rate-makers, they’re rate followers. They take their cues from the Federal Open Market Committee (which consists of the seven governors of the Federal Reserve and five Federal Reserve Bank presidents), which bases its rates largely on the supply and demand for money here and abroad.
Winner (for rates): This one is a draw.
As banks are profit-driven, you would think they would mark up their rates above what credit unions charge, but generally that’s not the case. You’ll get no argument from Mike Schenk, vice president of economics and research at CUNA. “We subscribe to a third-party service that tracks price, and on average, the rates are very similar,” he said.
Mortgage fees are the bane of borrowers. In August, I wrote about how to trim the fat from mortgage junk fees. Some, of course, are unavoidable, such as fees for title insurance and appraisals, but the longer the list, the murkier and more undecipherable they get.
Banks are notorious for lumping lots of charges under a catch-all category, called an origination fee, which is basically whatever a bank wants to charge you to process your loan.
In contrast, credit unions aren’t in the business of propping up profits with fat fees. Fees aren’t a huge revenue driver for credit unions as they are for banks.
CUNA has tried to quantify the savings in fees that its members receive. “Again, we’ve had a third-party verify that our members save on average of about $100 compared with banks,” Schenk said. “That’s not going to make a huge difference, but $100 is $100.”
Ted Rood, a mortgage originator with MB Bank in St. Louis, conceded that fees at credit unions are “nominally lower,” but that the difference was hardly a deal-breaker. “In most or at least many cases, conventional lenders — be they banks, correspondents or brokers — can give lender credits to offset some or all of the fees, which credit unions may be less likely to do.”
Winner (for fees): Credit unions
A Benjamin ($100) is a Benjamin. As an owner-member, I don’t want to pay superfluous fees that will enrich my credit union. I want to be charged fewer fees so that I’ll be richer. Despite the promise by some bankers to discount my fees, I’ll take the savings upfront that credit unions offer.
Even though it’s not a flattering analogy, you need only look back to the pre-Great Recession days to remind yourself of the passel of products banks were marketing to their customers. There were low- or no-documentation (no-doc) loans, interest-only loans, option ARMs. There was no end to their creativity. Chastened by the recession, banks don’t make nearly as many exotic loans as they once did, but they’re used to thinking outside the box to accompany a wide array of borrower needs.
For example, Kent Sorgenfrey, a lender with New American Funding in Tustin, Calif., is currently offering a first mortgage where the majority of the monthly payment goes toward paying down the principal, not the interest. That’s atypical because in the early years of standard mortgages, such as a 30-fixed-rate loan, payments go toward paying the interest obligation, with little left over to pay down the principal. “It’s a product uniquely designed for sophisticated clients,” Sorgenfrey said. “I don’t think any credit union can do that.”
There’s no question, credit unions stay in a more conservative lending lane. At the same time, credit unions have been diversifying their product lines to reflect regional needs. For example, Pentagon Federal, a 1.3 million-member credit union in Alexandria, Va., offers a 5/5 adjustable rate mortgage in which the rate resets every five years to the current market rate. It also offers a 15/15 ARM, which adjusts once, at the middle mark of a 30-year loan term.
Winner (for product array): Big banks
As far as product variety goes, banks are marketing machines, ever capable of nuancing products and niches for their targeted customer base. It’s like comparing Ben & Jerry’s Chunky Monkey to plain vanilla. Vanilla is good, but if you hunger for something more, banks deliver.
Ever since the mortgage bubble burst, largely precipitated by irresponsible lending by big banks, these same lenders have been reluctant to repeat the same mistake. Therefore, they’ve tightened their underwriting standards, aware of regulations that if they sell bad or unsupportable loans to investors, they could be forced to buy them back.
Credit unions never experienced the degree of losses that the banks did. “I think something like 500 banks failed, but only about 150 credit unions did,” Schenk said. “We weren’t saddled with a lot of bad loans that the big banks were.”
That’s because, Schenk noted, credit unions operate in a manner not unlike a small financial institution. “We’re more likely to listen to your story,” he said. Big banks, by contrast, rely on underwriting formulas and highly automated underwriting systems that put a premium on turn-times. “We’re more likely to make an exception or adjustment based on your unique circumstance,” Schenk added.
Unlike big banks that curtailed their mortgage lending to comply with tighter lending restrictions, credit unions never had to correct for misbehavior. “We stayed engaged,” Schenk said.
Winner (for underwriting): Credit unions
You can never beat the credit union’s personal touch. It’s hard to make your case that you’re a good risk for a loan when your bank underwriter is six states away. Credit this win to credit unions.
One of the biggest lessons to come out of the recession is that any kind of financial institution can fail.
Beholden to investors seeking acceptable returns, banks, by nature, have to take greater risks. Banks didn’t mind taking these risks when they pushed their loan products out the door and they became somebody else’s problem. But now that new regulations have introduced more accountability into the loan-making process (for instance, lenders actually have to be licensed now, demonstrating a degree of competency), there’s a greater likelihood that your lender will still be around when your escrow closes.
Again, credit unions never played this game, at least to the extent that banks did. That’s why charge-offs, or bad assets, at credit unions were only a quarter of what they were for other lenders.
Winner (for solvency): This one is a draw.
The new regulations have largely worked, so I don’t expect a repeat of any major bank meltdowns. At this point, I believe banks can be equally trusted as good stewards for your loan.
Bank lenders are highly incentivized for performance, so speed is everything in their world. Their loan officers have to hunt for business and then they have to deliver on their promises if they want to stay in business. Consequently, their loan officers or account executives take on a warrior mindset.
“I’m speaking from limited experience here,” Rood said, “but from what I have heard anecdotally, service at credit unions can be far less responsive, particularly in regards to loan officer expertise and dedication. Loan officers at credit unions are paid significantly less per loan that their counterparts elsewhere (because they are essentially handling walk-in business), so they may be less experienced, apt to meet with clients after hours or weekends, etc. Not trying to paint them all in this light, but it’s likely the case more often than not.
“Here’s an example,” Rood added. “I am currently working with a client who is undecided on a refinance. He is comparing my rate/costs with a local credit union. So far, without a commitment on his part, I have: obtained a CMA (comparative market analysis that estimates the value of the property) from an agent partner; met with him and his wife at their home (something the credit union loan officer was not interested in); and spent a significant amount of time analyzing their current loan (which is going from interest-only to fully amortizing*), telling them what the new payment on their current loan will be, how much principle they’ll be paying, etc.
*An amortizing loan is a loan where the principal is paid down over the life of the loan, typically through equal payments. Because an amortized loan covers both interest and principal obligations, monthly payments would be higher than they would be for an interest-only loan.
Banks have the automation process down pat, and bank lenders praise its advantages. “We now have everything completely automated and customers can do almost everything online, which really speeds up turnaround and simplifies the process… and you don’t have to be a ‘member,’ Sorgenfrey said.
Winner (for turnaround times): Big banks
This one goes to the banks, because they really hustle for your business. It’s a loan jungle out there, and they’ve shown that speed helps them survive.
Rood probably expressed it best: “The biggest single thing I advise clients to remember is that they are, first and foremost, obtaining a service, more so than a product. “The lowest fees, lowest rate, most wonderful programs, etc., are virtually meaningless if the originator is less than competent, professional, and responsive. If processing and underwriting don’t do their jobs seamlessly, if the closing department doesn’t get docs out on time, if the funding department doesn’t disburse your loan promptly, the costs/programs/rates are irrelevant.”
Here, Rood is making a case for both sides, because he argues that it’s ultimately the people behind the products that make the difference.
Winner (for service): This one is a draw.
I completely agree with Rood.
Final thoughts on where to shop for a mortgage
Banks have served us well for a long time, but credit unions, while not as prominent, have hardly been lurking in the shadows. This year, their membership topped more than 100 million. So if you’re already a member of one, and your credit union offers home loans, as about 80 percent do, why wouldn’t you at least give them a crack at your business? After all, you’re not just a customer of that institution; you’re a member owner. At the same time, if you’re not a member, it’s fairly easy to become one.
By the same token, if you’re a rate watcher, you can start by visiting the MyBankTracker’s mortgage page. If you find a competitive rate, contact that institution. Ask the bank lender how it performs based on the criteria, such as fees and products, listed above. If you like what you hear, schedule an appointment. Be honest with the lender and let the bank rep know you’re just shopping at this point. Tell them to wow you.
Let the different institutions make their case. Armed with the knowledge you now have, you know what to look for. Who is the most professional? With whom do you want to have a relationship that could last five, 10 or even 30 years?
Talk it out, compare… and you’ll know where to go!