Understanding and Comparing Mortgage Costs Between Banks and Credit Unions

What is better: a bank or a credit union? The question seems black and white, but the answer has many shades of gray. Today, we’ll explore cost differences between banks and credit unions, and what that can mean for your home buying experience.

Banks vs. credit unions

Banks and credit unions offer the same types of financial services including savings and checking accounts, loans, and digital tools such as online banking. They are both safe places to store your money, offering insurance for up to $250,000 per individual in deposits. Beyond that, their similarities start to diverge.

At their core, the difference between banks and credit unions starts with how they’re structured. A bank is a for-profit entity owned by a group of shareholders, while a credit union is a not-for-profit cooperative owned by its members.

Dig deeper and you’ll find how these structural differences shape the way each financial institution does business, ultimately affecting rates, fees, and the service you receive.

Mortgage rates

Because credit unions don’t have to pay federal income tax or dividends to shareholders, they’re able to put profits back into the organization. That often leads to lower loan rates and fewer fees for their members.

That said, it doesn’t mean credit union mortgage rates are always better. The National Credit Union Administration data from second quarter 2022 shows the national average rate for a 15-year fixed-rate mortgage offered by banks and credit unions was the same (4.69 percent). Banks had a slightly lower rate than credit unions for a 30-year fixed-rate mortgage (5.44 and 5.32, respectively). And credit unions took the lead for 5/1 adjustable rate mortgages (ARMs), with an introductory rate more than a quarter percent lower than banks.

Back up a year and you’ll find that credit union mortgage rates were lower in all three categories. But historical trends show that bank rates are competitive. 

• Key takeaway: Though it’s not a given, you may often find lower mortgage rates offered by credit unions. Remember that even marginal differences can lead to significant savings over the life of a loan.

Fees, points, and charges

Rate is important, but it’s not the only variable that impacts the cost of a loan. A mortgage comes with additional fees that can affect your monthly payment and how much you pay for the loan overall.

That’s why all lenders – including banks and credit unions – must include an annual percentage rate (APR) on their loan estimates. APR takes a more holistic view of a loan, taking into account interest plus some of the fees associated with the mortgage, such as origination fees, discount points, and mortgage insurance.

The APR allows you to comparison shop more accurately. And that’s important when deciding between a credit union and a bank. Credit unions are often praised for having fewer and lower fees than banks – which need to pay taxes and generate revenue for investors – but you won’t know until you see the APR.

• Key takeaway: Don’t stop at interest rates when shopping for a mortgage. Ask for the loan’s APR to get a better understanding of the full costs involved. 

Servicing

If you assume the organization that loaned you money will also process your payments and answer your questions along the way, you’re not alone. In fact, there are some key differences between a mortgage lender and a servicer, and they can show up very differently between credit unions and banks.

Some lenders do act as both a lender and servicer, working with borrowers from beginning to end. Others focus on sales and underwriting: Once a loan is closed, they turn it over to a servicer to handle the logistics of managing payments, escrow, and communication with the borrower.

Credit unions often pride themselves on offering superior, personalized customer service – knowing members by name, providing education on financial topics, and servicing loans in-house. Many banks service loans, too. Community banks in particular have a reputation for building strong relationships with their clients.

When comparing credit unions vs. community banks, you may notice a credit union’s ability to provide highly customized services and expertise to its members. Credit unions are often local, community-based, or cater to a specific clientele, such as veterans. A community-based credit union may provide information on local tax incentives and down payment options. An employee-based credit union may know more about financial instruments through your labor union or professional organization. That’s a stark contrast to big organizations that may see you as merely a number.

• Key takeaway: Some mortgage costs are non-monetary. Before choosing a lender, consider the type of service you’ll receive after you sign on the dotted line.

Are credit unions better than banks?

As you’ve probably gathered by now, it depends. The cost of borrowing with a credit union mortgage vs. a bank could be very similar or different depending on the timing and your personal situation. Just remember these three takeaways as you search for the best option:

1. Explore rates from a variety of lenders.
2. Look at the total costs of the loan.
3. Consider the total experience you’ll receive.