Costco, the well-known mega wholesaler that runs a chain of membership warehouses internationally, is rolling out it’s so-called “Mortgage Services” to all customers after a year of initial testing.
The company already offers all types of insurance, a co-branded credit card, RV and boat loans, beer, wine, electronics, not to mention gigantic tubs of mayonnaise.
So what’s the deal here? Why is Costco getting into mortgage? Could it really be that profitable?
Costco Is Marketing Mortgages, Not Making Them
- Costco isn’t originating mortgages
- They are simply marketing home loans
- Via their lending partners
- To their massive stable of customers
Let me start by saying there is no Costco Mortgage. What Costco’s really doing is marketing a mortgage product on behalf of another company, namely, First Choice Loan Services Inc.
They don’t get paid for the loans that close or receive any sort of loan origination fee.
Costco is simply partnering with First Choice Loan Services Inc., a Berkshire Bank subsidiary, which is leveraging the warehouse chain’s loyal and enormous customer base.
That means we should be more concerned about who First Choice Loan Services Inc. is, which is the company that’s really doing the mortgage lending here, including taking the loan application and underwriting, processing, and funding it.
First Choice Loan Services Inc., out of East Brunswick, New Jersey, is a baby in terms of years in the banking industry. They also only have branches in a handful of states, despite being licensed nearly everywhere.
They’ve only been around since 2009, but since then they’ve apparently doubled in size and now have a team of nearly 500 employees that produce $2.4 billion annually. Thanks Costco!
They are a direct lender that offers so-called boutique-style mortgage lending with loan production offices in Arizona, Colorado, Florida, Maryland, New Jersey, Pennsylvania, and Texas.
And Costco apparently oversees the company, holding them to rigorous standards to ensure they protect their good name and their own customers, though they don’t endorse them or hold themselves responsible.
Costco Partners Now Offer Jumbo Mortgages
- Early on Costco didn’t offer jumbo loans
- Which is ironic given the company’s typical offerings
- But you can now get anything from a conforming loan to a jumbo
- Or an FHA loan, USDA loan, VA loan, and even a renovation loan
There was no mention of jumbo loans, despite Costco specializing in all things jumbo, like tubs of mayonnaise.
So if you had a big loan, you’d be out of luck. But times have changed and First Choice now advertises jumbo loans, though it’s unclear if they are true jumbos, or just high-cost agency loans.
Older Costco members might be interested in their reverse mortgage program as well.
First Choice Loan Services actually oversees a group of preferred lenders, including national depository banks and mortgage bankers, such as CapWest Mortgage, which I’ve already reviewed.
Other participants in the Costco Mortgage program include:
– Bank of Internet USA
– Berkshire Bank
– CapWest Home Loans
– Consumer Direct Mortgage (a division of FirstBank)
– eRates Mortgage
– J.G. Wentworth Home Lending, LLC
– NBKC Bank
– PennyMac Loan Services, LLC
Costco Mortgage Works Like Zillow Mortgage Marketplace
- It’s more of a lead acquisition program
- Than it is a home loan lending program
- Costco is just playing matchmaker
- Like they do with most products they don’t offer directly
In a way, the Costco Mortgage program works kind of like the Zillow Mortgage Marketplace.
Costco members enter in their personal details, including property and loan information, and are then presented with a number of mortgage rate quotes.
But borrower information will only be shared with participating lenders if you actually request a rate quote, which allows for some anonymity.
If you do happen to like one of the rate quotes, your lender fees will also be discounted because Costco caps them.
In terms of financing options, Costco has nothing to do with what is and isn’t offered. They don’t set the minimum down payment or get involved with any other underwriting guidelines.
The same goes for mortgage rates – Costco doesn’t set them or have anything to do with them.
As noted, they simply let lenders advertise their loan products to their client base.
Costco Mortgage Fees Are Capped
- Costco provides reduced lender fees for its members
- Which includes things like application, underwriting, and processing
- But not third-party costs like appraisal and title/escrow fees
- Executive members only pay lender fees of $350 or less
- Gold star members pay lender fees of $650 or less
One plus to the program is that lender fees are capped for Costco members, with Executive Members paying $350 or less and Gold Star Members paying $650 or less.
Be sure to compare this to standard lender fees, which can range from zero to a very high number depending on the circumstances.
So we know there are some potential savings there, but it really depends what the interest rate is that goes along with those fees. Closing costs can’t be viewed in a vacuum, we need context.
Should You Use Costco to Get a Mortgage?
- Costco is yet another option to consider
- But I wouldn’t rely on Costco alone to find you the perfect home loan
- If you don’t shop around elsewhere
- You won’t know if it’s a good deal or a bad one
There was also one thing that stood out to me in the fine print that I didn’t love.
This is actually no longer on their website, but at one point they noted that lenders are “held to very strict pricing and fee standards which limit their ability to negotiate a lower fee or rate.”
To me that tells customers they should just accept the rate they’re given because it’s already rock bottom.
Regardless, I always recommend negotiating your mortgage rate, no matter how good or low it might be. There’s always room to go lower.
All in all, it appears as if Costco is just another avenue to go down while shopping for a mortgage, which isn’t necessarily a bad thing. More options are always good.
I certainly wouldn’t rely on Costco to find you the best mortgage out there though. You should also shop around beyond Costco to make sure you exhaust all options.
This includes checking out other online lenders, visiting a local bank or two, a credit union, and speaking with a mortgage broker or three. Don’t cut corners!
Getting a mortgage is a big deal, and even a slight change in rate can mean thousands in savings or costs over the life of your loan.
Read more: What mortgage rate can I expect?