Mortgage shopping: Bank, broker or credit union?

OCCU staff greeting member at Mohawk branch
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The bigger a purchase is, the more likely we are to shop around for the best deal—except when it comes to home loans. Most homebuyers spend more time hunting for the lowest price on a flat-screen TV than on their mortgage.

One study found that nearly half of homeowners don’t compare mortgage lenders at all before buying a home, and 75 percent apply with only one lender or broker.

“Almost nobody looks only at one house and decides to stop right there,” says Richard Cordray, director of the U.S. Consumer Financial Protection Bureau (CFPB). So why would you do that with your mortgage?

Shopping for a home loan isn’t as thrilling as shopping for the home itself, but avoiding it will only make your new digs more expensive. Interest rates on a 30-year fixed rate conventional home loan can vary by as much as half a percent from lender to lender. Getting a 4 percent rate rather than 4.5 percent could mean saving roughly $3,500 in mortgage payments—and paying off an extra $1,400 in principal—all within the first five years of your loan.

Bottom line: Nine in 10 homebuyers who shop around will score a better deal, so you definitely want to comparison shop. But here are three things you need to know first:

1. Current interest rate

Mortgage rates can vary from day to day and from lender to lender, but for the most part they follow a general trend. Last year they dropped unexpectedly, which was great for homebuyers, but this year they’re expected to creep back up—although they’re still historically low at around a 4.2 percent national average.

Simply knowing the average interest rate before you start mortgage shopping can actually help you get a better deal. For one thing, it gives you a benchmark for comparison as you contact lenders. Plus, it makes you a savvier shopper. Homebuyers who are confident in their knowledge of mortgage rates are nearly twice as likely to compare lenders as those who aren’t.

2. What mortgage brokers do

There are so many different lenders out there. When you’re shopping for a mortgage, where do you start? Many homebuyers start with a mortgage broker, which is fine—as long as you don’t stop there.

A mortgage broker can save you time by finding a mortgage for you. They have access to multiple lenders, which means you end up with a wider selection of products and terms to choose from. That can be helpful, but it’s unwise to let one mortgage broker do all of your shopping for you.

For one thing, mortgage brokers aren’t necessarily out to get you the best loan terms. In fact, the higher the interest rate they secure, the more they make in commission. Then there’s the fact that a mortgage broker’s services come with a fee, so that’s one more cost you’ll need to compare and negotiate.

3. The difference between credit unions and banks

Another option is to skip the middleman and go straight to the lenders themselves. You’ll spend time shopping around, but chances are you’ll get a better deal. Since they’re the ones originating the loan, they’re empowered to save you money.

But there are so many different types of lenders, it’s hard to know where to start. Many homebuyers are confused, for example, about the difference between banks and credit unions. Understanding how they differ could save you money on your home loan.

The key difference is that while banks are for-profit corporations owned by wealthy investors, credit unions are not-for-profit co-ops owned by the people who bank with them. When you get a home loan from a credit union, you become part owner of your own financial institution. It’s empowering!

But here’s the best part: Since we’re not-for-profit, credit unions don’t put our profits into the pockets of investors. We put them back into the pockets of homeowners by offering lower mortgage rates and fees than most banks. That can add up to significant savings over the life of your loan.

Finding the best deal on a mortgage can be a time-consuming task, but the savings are worth it. The key is to check with a variety of lenders and compare the loan terms they offer. You wouldn’t buy the first home you came across—or the first flat-screen TV, for that matter—without shopping around first. Your home loan should be no different.