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Today's mortgage rates underscore the importance of good credit

Posted by  on Aug 06, 2012
 

Traditionally, borrowers with the strongest credit histories have gotten the best mortgage rates. Today, a spotless credit history might be necessary to get any kind of mortgage at all.

The lowest mortgage rates on record might seem like an unqualified plus for all borrowers. However, today's mortgage rates actually draw sharper distinction between the haves and have-nots - in this case, those who have good credit and those who do not.

"To Have and Have Not" - Today's classic tale of credit

During the housing boom, banks actually welcomed customers with poor credit histories because they could charge those customers higher interest rates. When the sub-prime mortgage market took off, higher interest was the price some paid for bad credit.

Of course, before long, banks were burned by the sub-prime market. A combination of borrower defaults and falling real estate values took the profitability out of sub-prime loans and now that market has dried up. These days, the price of bad credit isn't simply paying a higher interest rate; it is the inability to get a mortgage at any price, as lenders have gotten more selective in awarding loans.

The contrast between having good credit and bad credit has been sharpened by the record low levels of today's mortgage rates. 30-year mortgage rates recently dipped to 3.62 percent, the lowest levels on record. However, only people with very good credit records are likely to get such a mortgage. Not only were banks burned by sub-prime mortgages in recent years, but low mortgage rates make them more reluctant to lend.

When you consider that inflation has averaged 2.94 per year over the past 30 years, and that current mortgage rates are just 0.68 percent higher than that, it begs the question: Why would a lender commit to earning barely more than the long-term inflation rate for the next 30 years, unless getting paid back was close to a sure thing?

Consequently, people with good credit are rewarded with the mortgage opportunity of a lifetime while people with bad credit are punished by being shut out of that opportunity. This contrast is perhaps even more significant when it comes to refinancing, as people with shaky finances are unable to take advantage of lower mortgage rates that might help put them on more solid footing.

Given today's economic climate, the twists and turns in the mortgage loan industry make for page-turning drama. Having a good credit score, though, can mean the difference between a tragic ending and a happy one.

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