Few significant differences exist between credit union and bank mortgages in contemporary society. However, some credit unions still have membership restrictions depending on where you live or work, while most banks have no such prohibitions. Also, credit unions are nonprofit institutions, exempt from federal taxes, and that sometimes translates into lower interest rates and fees for mortgage loans.
Secondary Market Mortgages
Since both credit unions and banks typically sell mortgages into the secondary market, such as Fannie Mae and Freddie Mac, qualifying rules, interest rates and most mortgage terms are essentially the same. The secondary market dictates the terms of the loans it will buy. Credit unions and banks are subject to the same secondary market rules. The secondary market also sets "buy rates," which are the same for both types of financial institutions.
Mortgage loans that are not sold to the secondary market are kept at the financial institution. Banks seldom hold portfolio mortgages, but some credit unions continue to offer these loans. Borrowers who face challenges qualifying for secondary market mortgages can benefit from credit union portfolio loans, as the institution sets -- or can change -- its own qualifying standards. You typically pay a slightly higher interest rate because the credit union has rate risk by holding the loan for 15 to 30 years; these loans may help people who are good credit risks but don't fit standard qualifying rules.
Since credit unions are exempt from federal taxation, borrowers may get slightly lower interest rates, even on secondary market mortgages with the same buy rates, than loans offered by banks. Credit unions' lower operating costs may allow them to have lesser "profit" margins than banks, thereby offering lower interest rates. If you qualify as a credit union member, saving even one-eighth or one-quarter of a percent could mean thousands of dollars in savings, depending on the amount of the mortgage you need.
Closing Costs and Fees
For the same reason you might save on interest rates, you can often save money on closing costs and fees by getting a credit union mortgage loan. Their federal tax exemption and lower expenses often result in reduced closing costs and fees to mortgage borrowers. Banks often -- but not always -- have higher fees and closing costs.
Shop for the Best Deal
Shop around for the best mortgage loan terms at both credit unions and banks. While credit unions often offer better terms and lower rates than banks, this is not always true. Some banks that close large volumes of mortgage loans may offer better rates than credit unions closing smaller numbers of mortgages. If you find a credit union mortgage that offers the best terms, find out if you can become a member before you make any loan selection.
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