What Is the Difference Between a Bank Home Loan and a Credit Union Home Loan?
You can select a home loan from any financial institution or individual offering financing. Banks are just one option. Individuals who are looking for an alternative may consider a credit union home loan, which is very similar to a bank home loan for all intents and purposes. Key differences lie in the cost of the loan, regulation of the credit union and other small details.
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Definition
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A bank is any institution taking regular cash deposits. It can also extend loans, manage investments and offer investment accounts. By definition, banks are run by private companies or individuals seeking a profit. Credit unions, on the other hand, are run by their members. The function of a credit union is different from that of a bank. The union is not for profit, and it exists to service the needs of its members. By coming together with other individuals in your union, you can build up an account large enough to offer home loans.
Benefits
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A credit union loan will typically be less costly than a bank loan. Because the institution is not looking to draw a profit, it can charge lower interest rates. Further, credit unions are less likely to charge large fees to initiate a loan or refinance a loan in the future. Credit unions are insured by the National Credit Union Administration, an agency backed by the federal government in the same manor as the Federal Deposit Insurance Company. Up to $250,000 of the money you place in a credit union is insured. With this regulation in place, credit unions must maintain their solvency or risk losing the protection. Credit union loans qualify for Federal Housing Administration (FHA) guarantees.
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Drawbacks
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While credit union home loans can be less expensive than bank loans, they can also be less forgiving. The credit union cannot afford to lose money on a loan to the same degree a bank can. A bank has the opportunity to sell the loan, invest loan interest and otherwise protect itself in case of default. A credit union has no chance of profit from the loan, so it must also make sure there is next to no change of default on the loan. This means it can be very hard to secure a credit union loan.
Considerations
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Not all credit unions are created equal. They are run by members, and these members do not have to possess the same qualifications as the leaders of banks. Further, many credit unions do not follow regulation to maintain their insurance status. Your state will independently manage its credit unions. Consult your state regulation and federal insurance before trusting any credit union with your money or your home loan.
Expert Insight
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Shop around when it is time for you to take a loan. You will end up paying for the loan, which turns your mortgage into a purchase. Make your purchase after you are educated on the topic, have spoken to necessary legal or financial professionals, and have determined the credit union or bank option is right in your scenario.
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References
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