New study shows real impact of credit scores on mortgage rates


As buyers prepare to make a purchase, one of the first things they look to improve is their credit rating in the hope of securing a favorable mortgage rate. However, the latest OwnUp digital mortgage market study released on Thursday found that a good score does not guarantee a low rate.

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

“It’s common for homebuyers to assume that if they have a good credit rating, their lender will offer them a competitive interest rate – that having that kind of rating (usually 740 or higher) entitles them to a lower rate, “he added. . “[However], mortgage rates can vary widely, even with exceptional credit.

The report noted that while lenders use the same four criteria to assess homebuyers (e.g., loan repayment capacity, principal, collateral, credit), they all have additional individual parameters that they use to determine the rate to be offered. The type of housing (for example, condominium or single-family home), zip code and the specific loan product requested by the buyer have a major impact on the final rate.

Using second quarter 2021 mortgage rate data, OwnUp found creditworthy buyers with excellent credit scores (740+) who received rates as low as 2.4% and as high as 3.5% . Buyers with credit scores below 699 had an even wider range, with rates as low as 3% and as high as 4.5%.

While the difference seems unimportant, the report says that credit spreads can add five digits of interest over the life of a loan, even for buyers with stellar credit profiles.

“Even a quarter of a percentage point can add up to tens of thousands of dollars over the life of the loan,” the report explains. A general rule of thumb is that the difference in interest across the range equals about 10 percent of the price of the house.

“For example, if you buy a house for $ 400,000, a good rate will save you $ 40,000 compared to a bad rate,” he added.

Additionally, OwnUp said that a buyer with an average credit score who takes the time to shop around and negotiate mortgage rates can save more money in interest payments than a buyer with an excellent credit score who accepts the first rate granted to it.

Credit: OwnUp

“Armed with this information, a borrower with poor credit, but who shops and negotiates well during the home financing process, can save a lot on interest payments over the life of their loan,” the report says. “Illustrated by this graph, a borrower with bad credit, but who secures a low interest rate by negotiating, will save $ 37,000 over the life of his loan, compared to a borrower with strong credit, who locks himself in.” at a bad rate. . “

The report underscored the importance of taking the time to shop around for mortgage rates, even in a fast-paced market where buyers feel pressured to get loans as early as possible so they can buy a home. “As borrowers near the finish line of a long home-buying journey, they tend to just focus on securing their purchase and approving the mortgage,” may -on read. “They may feel rushed or overwhelmed, or they may be counting on a trusted recommendation from a friend, real estate agent, or a big brand.”

While the process of finding loans is complicated, OwnUp said buyers’ time will be well spent once they see how much they can save.

“This step alone can save you tens of thousands of dollars over the entire term of your loan, and that translates into significant savings for things like retirement or building a college nest egg.” , concludes the report.

Email Marian McPherson


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