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.asmarterchoice.org/.

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.

Published on December 15, 2011