New research reveals the true impact of credit ratings on mortgage rates

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When shoppers are preparing to buy, they are primarily looking for improve their credit score hoping to get a favorable mortgage rate. However, the latest OwnUp digital mortgage market research released Thursday found that a high score does not guarantee a low rate.

“When you apply for a mortgage, if you have a high credit rating, you can often qualify for a lower interest rate because the lender sees you as a reliable, low-risk borrower,” the report said. “They are willing to offer you a better deal, knowing that you are more likely to pay your bills on time.”

“Home buyers often assume that if they have a high credit rating, their lender will offer them a competitive interest rate – that having such a rating (usually 740 or higher) qualifies them for a lower rate,” it added. “[However]mortgage rates can vary greatly even with a star loan. ”

The report notes that although lenders use the same four criteria To assess home buyers (eg, ability to repay a loan, equity, collateral, credit), they all have additional individual metrics that they use to determine which rate to offer. Type of housing (for example, condominium or single-family home), Zip code and specific credit product the claimant buyer will have a material effect on the final bid.

Using mortgage rate data for the second quarter of 2021, OwnUp found that creditworthy buyers with an excellent credit rating (740+) received rates ranging from 2.4% to 3.5%. Buyers with a credit rating of less than 699 had an even wider range, with rates ranging from 3% to 4.5%.

While the difference seems inconsequential, the report says rate spreads can add five-figure interest over the life of a loan, even for buyers with a stellar credit profile.

“Even a quarter of a percentage point can mean tens of thousands of dollars over the life of a loan,” the report explains. The general rule of thumb is that the percentage difference across the range is approximately 10 percent of the home price. ”

“For example, if you buy a house for $ 400,000, a great rate will save you $ 40,000 over a bad one,” they added.

In addition, OwnUp reported that a buyer with an average credit rating who spends time shopping and negotiating mortgage rates can save more money on interest payments than a buyer with an excellent credit rating who accepts the first bid they are given.

Credit: OwnUp

“Armed with this information, a borrower with bad credit but who chooses and negotiates well in the home finance process can save significant interest payments over the life of their loan,” the report said. “As shown in this graph, a borrower with bad credit but negotiated low interest rates will save $ 37,000 over the life of their loan compared to a borrower with a strong credit history who is stuck in a bad interest rate. … “

The report noted that it is important to take the time to set mortgage rates, even in a fast-paced market where buyers feel pressure to get a loan as soon as possible in order to get a home. “As borrowers near the end of the long road to buying a home, they tend to focus on just securing their purchase and getting mortgage approval,” it says. “They may feel rushed or overwhelmed, or they may rely on trusted advice from a friend, realtor, or major brand.”

While the process of buying a loan is daunting, OwnUp says buyers will be wasting time when they see how much they can save.

“This step alone can save you tens of thousands of dollars over the life of your loan, which means significant savings on things like retirement or building a bird’s egg for college,” the report said.

Email Marian McPherson



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