Should I Refi with a Credit Union, Bank, Mortgage Broker, or Mortgage Lender?

If you’re dissatisfied with your current lender, you may be interested in exploring different options for your refinance loan. Each type of lender — from local banks and credit unions to brokers and online loan originators — has different strengths and weaknesses. Your lender should have strengths that line up with your needs and preferences. 

Let’s discuss the pros and cons of credit unions, banks, mortgage brokers, and mortgage lenders so you can decide which is best for you. 

Pros and Cons of Using a Credit Union to Refinance

Credit unions are nonprofit organizations. They earn money to cover their operating costs, but they don’t face pressure to earn a profit. This allows credit unions to pay higher savings rates — and to offer more competitive mortgage rates — to their members.

Pros Of Using A Credit Union

• Savings: No pressure to profit = possibility for lower refinance rates
• Local: Many credit unions are locally or regionally owned
• Customer care: Many credit unions excel at in-person customer service
• More savings: Along with lower rates, credit unions may also charge lower loan origination fees and other fees

Cons Of Using a Credit Union

• Lack of access: Some credit unions limit membership. Some welcome only military members or only public employees, for example. But some credit unions welcome the general public into membership
• Product lineup: Credit unions won’t always have every mortgage type. If you’re planning to get a niche product — a USDA Streamline Refi, for example — you may need to shop somewhere else
• Fewer branches: On average, credit unions have fewer branches and ATMs, though most now have online banking. This can make branch and ATM access less important

Credit unions are best for: A credit union member who wants a conventional or FHA mortgage refinance at a competitive rate and from a friendly face.  

Pros and Cons of Using a Bank To Refinance

Most Americans pass dozens of banks in their daily travels. Whether they’re locally owned or part of a big national brand, these banks specialize in everyday financial products like checking and savings accounts. Banks also provide loans, including mortgages and refinances.  

Pros of Using a Bank

• Access: The biggest banks have branches and ATMs in most shopping centers and downtown areas
• Broader product lineup: Banks usually offer a wide variety of government-sponsored and conventional loans 
• Seamlessness: You could apply for the loan — and eventually make payments — in the same app where you see your checking account balance 

Cons of Using a Bank

• Higher costs: The need to make a profit can drive up borrowing rates and fees compared to credit union loans
• Anonymity: Some banks have millions of borrowers; being one in a million isn’t always a good thing
• Experience level: Banks do a lot of things, so they don’t specialize in mortgage lending. This could mean your loan officer hasn’t closed many refinance loans before  
• Slow pace: Application processing can take longer at a big bank

Banks are best for: Homeowners who want to keep things simple by using the same bank they already use. But remember the bank could sell your mortgage to a loan servicer after you close the refi.  

Pros and Cons of Refinancing with a Mortgage Broker

A broker is a go-between, connecting borrowers with several, or maybe even a dozen, lenders. Then the borrower can pick the best refinance deal from the list of options. The best brokers know which lenders will match up best with the borrower. The best brokers find deals that borrowers couldn’t find on their own.

Pros of Using a Mortgage Broker

• Easier to compare: Customers can see several loan quotes at once, making it easier to compare loans side by side, saving time
• Product lineup: With more choices, borrowers are more likely to find a lender with their ideal refinance type
• An independent expert: Ideally, a broker has inside knowledge but is not committed to a single mortgage lender

Cons of Using a Mortgage Broker

• An extra step: After the borrower chooses a lender, the borrower may still need to apply with that lender, and the details shown by the broker may not always be the same as the final details
• Loss of control: Having a go-between can save time, but it can also limit options
• Broker’s fee: Borrowers may not pay their broker directly, but that doesn’t always mean the broker’s fee isn’t worked into the new loan in some other way
• Transparency: Some borrowers can’t get past the idea that the broker could be showing deals that benefit the broker and not necessarily showing the borrower’s best option

Mortgage brokers are for: A homeowner who doesn’t mind giving up some control over the shopping process in exchange for doing less of the legwork. Even then, borrowers should always find a broker they trust.  

Pros and Cons of Refinancing with a Mortgage Lender

Mortgage lenders are the ones actually issuing the money, similar to a bank, unlike mortgage brokers. Lenders specialize in mortgage loans, including refinances.

Pros of Using a Mortgage Lender

• Experience: Since loan officers at mortgage lenders work only on mortgage loans, they can become experts faster 
• Product lineup: Most lenders offer most refinance options, though few lender can offer every possible loan
• Speed: Lenders get borrowers to closing day faster on average. Many also have efficient online applications  

Cons of Using a Mortgage Lender

• Less access: Some direct lenders have brick-and-mortar offices, but many operate online only, meaning customer service happens over the phone or via chat  
• Outside servicer: Lenders don’t service the loans they originate. The mortgage will be sold to investors, and borrowers will make payments to a different loan servicer 

Mortgage lenders are best for: Homeowners who want to refinance quickly and also want to apply and submit documents online. 

Reason for the Refinance Should Inform Borrowers’ Decisions

Sometimes, finding the right type of lender depends on the reason for the refinance. Common refinance reasons include:

Streamline Refinancing 

A Streamline refinance is faster, simpler, and cheaper than a full refinance, but not every homeowner can get one. Streamline loans work only for homeowners who already have a government-sponsored loan — such as an FHA or VA loan.

The FHA Streamline Refinance, for example, works only for existing FHA home loans. These loans can save homeowners money without requiring a credit or income check.

A Streamline refinance is best for: Homeowners who financed their purchase with a government-sponsored loan and want to keep the same loan type. 

Best type of lender to use for Streamline refinancing: Mortgage lenders

Cash-Out Refinancing

Cash-out refinancing does two jobs at once:

1. Refinances existing mortgage debt into a new loan
2. Pays cash to the homeowner. This cash is borrowed from the home’s value and must be repaid as part of the new refinance

For this to work, the homeowner must already have enough equity. Equity is the part of the home’s value that exceeds the existing mortgage debt. For example, a homeowner who owes $150,000 on a $250,000 home would have $100,000 built up in equity. 

Cash-out refinancing is best for: Homeowners who have equity but need cash. Cash-out borrowers also need room to improve their existing loan’s terms. (It usually makes no sense to refinance into a higher mortgage rate, for example.)

Best type of lender to use for cash-out refinancing: Any type. It depends on borrower preference.   

Refinancing to Eliminate PMI

Home buyers who put less than 20 percent down pay private mortgage insurance (PMI) premiums. On average, PMI adds about 1 percent to a loan’s cost each year.

Understandably, many homeowners would rather stop paying PMI, and they think refinancing into a new loan will eliminate this extra cost. This is not necessary: Conventional loan borrowers can cancel their PMI once the loan balance falls to 80 percent of the home’s value. (The lender should automatically cancel PMI when the balance falls to 78 percent of the home’s value.)  

Refinancing To Eliminate FHA Mortgage Insurance Premiums (MIP)

Most homeowners who bought with an FHA loan will pay the FHA’s mortgage insurance premiums (MIP) throughout the life of the loan. MIP will not cancel automatically unless the borrower put 10 percent or more down when they purchased.

To get rid of this extra cost, most FHA homeowners must refinance into a conventional loan. You may even be eligible for a partial MIP refund if you received your current FHA loan in the past three years. 

Refinancing to eliminate FHA MIP is best for: Existing FHA borrowers who have at least 20 percent equity in their homes and can qualify for a competitive interest rate on a conventional refi. (Paying a higher rate on the new loan could cost more than keeping the existing FHA loan.)

Best type of lender to use for cash-out refinancing: Any type, depending on borrower preference. 

Refinancing To Eliminate a Co-Borrower

Some homeowners need to eliminate a co-borrower from their existing loan. A refinance is often the best option. 

Refinancing to eliminate a co-borrower is best for: Homeowners in the midst of a divorce or other changing relationship with the co-borrower. 

Best type of lender to use when eliminating a co-borrower: Borrower’s preference. Streamline refinancing (see above) could be the fastest and cheapest route for current government loan holders. 

Getting the Best Deal on Your Refinance

If there’s a mortgage refinance in your near future, start planning now by polishing up your credit profile. Make other debt payments, like credit card and student loan payments, on time. Pay down credit card balances if you can.

When it’s time to apply for the refinance, be sure to compare at least three different lenders. Compare online lenders to local banks and credit unions. Work with a broker if you don’t want to spend this time comparing loan rates and fees.

The money you save can add up to thousands of dollars, or more, over the life of a loan.