The Trade-off Between Mortgage Rates and Credit Scores
By: Freeman Liz
July 06, 2010
If you want the best mortgage rates, you already know that it takes a high credit score. But what if your credit is only kind of sort of good? How much extra will you pay for today's record-breaking low interest rates?
Assuming that you have 20% home equity or down payment, it takes a 740 credit score to get the best possible rate on a Fannie Mae mortgage. If your score is 699, your fees increase by at least 1.0% of your mortgage amount, and perhaps more if you're financing a condo (add .75%) or manufactured home (add .5%), taking a cash-out refinance (add 1.375%), or opting for interest-only payments (add .75% and close before August 1, 2010). On a $400,000 loan, that extra 1% adds $4,000 to your other mortgage closing costs!
Thinking about it that way, it might be smarter to improve your credit score and refinance a little later than to pull the trigger now. First, there's no guarantee that mortgage rates are going to increase significantly over the next few months. In fact, analysts and experts nationwide expected mortgage rates to move up once the Treasury department stopped its purchases of mortgage-backed securities in March. Instead, mortgage interest rates dropped to record-breaking lows! So there is no reason to believe that rates will suddenly ratchet upward.
The bottom line? If your credit is already excellent, you'd be silly to hold out for still lower rates -- they are unlikely to materialize. But if a small increase in your credit score, attainable in the short term, could significantly drop your refinancing or buying costs, why not hold out for just a bit longer? How do you know what kind of credit score-based surcharges would be added to your mortgage????? Here's a quick run-down of Fannie Mae's:
| Loan-to-Value | ||||||||
| Credit Score | 60% or less | 60.01 - 70% | 70.01% - 75% | 75.01% - 80% | 80.01% - 85% | 85.01% - 90% | 90.01% - 95% | 95.01% - 97% |
| >739 | -0.25 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| 720-739 | -0.25 | 0 | 0 | 0.25 | 0 | 0 | 0 | 0 |
| 700-719 | 0 | 0.5 | 0.5 | 0.75 | 0.5 | 0.5 | 0.5 | 0.5 |
| 680-699 | 0 | 0.5 | 1 | 1.5 | 1 | 0.75 | 0.75 | 0.5 |
| 660-679 | 0 | 1 | 2 | 2 | 2.25 | 1.75 | 1.75 | 1.25 |
| 640-659 | 0.5 | 1.25 | 2.5 | 2.5 | 2.75 | 2.25 | 2.25 | 1.75 |
| 620-639 | 0.5 | 1.5 | 3 | 3 | 3 | 2.75 | 2.75 | 2.5 |
And these may not be all of the add-ons you deal with. Others, such as the one for cash-out refinances, increase as your credit score decreases. A good mortgage loan officer can tell you if any of them apply to you. If you're just a few points shy of qualifying for a better interest rate, try locking in your loan for thirty, forty-five, or sixty days, paying down some account balances, and seeing if your score increases before you close on your mortgage. It could save you thousands.
