If you’re mulling a home equity loan or line of credit (HELOC) to fund a home improvement project and have good credit, add a credit union to your borrowing consideration set. These not-for-profits will not only save you on the fees and interest rate (as much a percentage point, says Bankrate.com) associated with the loan compared with a traditional, or even a community, bank, but they often deliver more personalized customer service.
But the process and qualifications for the loan will be just as much of a rigmarole as working with a bank.
Be smart about taking on debt
Before you take out an equity loan or line of credit from any lender, carefully weigh your long-term financial situation. Ask yourself, and be able to answer yes to, these questions:
- Do you have the means to pay back the loan?
- Are you using the loan for something that will contribute to the value of your home or the future of your family?
- Will the loan put you in a better financial position in the long run?
- Are you prepared to lose your home if you can’t pay back the loan?
Advantages of credit unions: You can save money
So how much lower are credit union interest rates than banks? Over a two-and-a-half year period beginning in May 2009, Bankrate.com says that rates on a $30,000 HELOC averaged 1.2 percentage points less at credit unions than at banks or thrifts.
“The long-standing advantage credit unions have held, on average, extends to nearly all products,” says Greg McBride, a Bankrate senior financial analyst. “Credit unions typically offer higher average rates on deposits and charge lower rates on loans. The one area where there’s a dead heat between banks and credit unions is in mortgages, owing to the large role played by the secondary market.” (Mortgage giants Fannie Mae and Freddie Mac have historically been able to help keep rates lower compared with the private sector.)
Credit unions can pass on lower rates, waive fees, and amp up the customer service experience because they’re non-profits designed to serve their members rather than answer to profit-demanding shareholders as banks must do.
In addition, they’re more willing to lend money since they, unlike their traditional banking counterparts, haven’t been bogged down with bad loans made during the housing crisis. Credit unions, which typically hold their loans in their own portfolio instead of selling them to a third party, were often more careful lenders during the boom.
By the way, being a member of credit union can mean free checking and even dividends; once you make that first deposit, you become a stakeholder.
Disadvantages of credit unions
- Credit unions are typically small institutions, licensed to provide real estate loans only in the state they operate in. Although you may qualify to join an out-of-state credit union, you may not be able to secure a home equity loan or HELOC from that institution if it isn’t licensed in the state you live in. Some large credit unions do provide loans in multiple states.
- They may not have the latest banking technology, so expect to make repeat in-person visits for services.
- Credit unions may not offer all the products and services a bigger bank does.
- For these reasons, a bank could still win your favor. And because of backlash from customers, banks are increasingly willing to step up their customer service to land new business or keep existing customers.
Finding a credit union
Although you needn’t have your mortgage with a credit union to get a home equity loan or line of credit, you do need to be a member if you want to apply for the loan. That means you’ll have to become a member even if you decide not to take out the loan with the credit union.
You join a credit union based on some affinity — your employer, your house or worship, your geographic area, or because you belong to an organization like the armed services or a union. The Brentwood Baptist Church Federal Credit Union in Texas serves members of the Brentwood Baptist Church, for instance, while transportation workers in Philadelphia and their families are eligible to join the Transit Workers Federal Credit Union.
Search findacreditunion.com for credit unions in your area. If you qualify, you’ll pay a one-time fee of anywhere from $5 to $25 depending on the institution. Expect to save on:
- Fees to apply for the loan will be waived
- Interest rates over the life of the loan
- Costs associated with the underwriting process of the loan
Shop around for your loan
As with any big purchase, make sure to shop around before deciding on an equity loan or HELOC. That means getting rate quotes from banks as well as credit unions. A rule of thumb: Always get at least three estimates before making any moves.