When home shoppers are looking around for the best mortgage rates, they may wonder why they aren’t quoted the ones they see advertised online or by banks. Lenders usually advertise the best interest rates that are available only to their borrowers with the highest credit scores.
Credit scores can have a big impact on what borrowers are quoted with mortgage rates.
Forbes.com paints the following scenario in a recent article: Two neighbors are both applying for a $300,000, 30-year fixed-rate mortgage. The only difference is one has a credit score of 750 and the other has a credit score of 620. In that scenario, the borrower with a 750 credit score may be able to get the 3.75% advertised rate with a $1,390 per month mortgage payment. On the other hand, the borrower with the 620 credit score may be quoted a 4.50% interest rate with a $1,520 per month mortgage. The difference in payments is $130 more per month and a 0.75% higher mortgage rate.
The other borrower can still get a lower interest rate, but they would need to pay extra for it. In order to get the 3.75% interest rate that the other borrower gets, that borrower would have to pay points to buy the 4.50% rate down to 3.75%. That could cost anywhere between $3,000 to $6,000, but could offer thousands of dollars in savings over the life of the loan.
Lenders use a risk-based pricing to determine the interest rates to quote borrowers. Credit scores are weighted heavily. Lenders will offer the same exact loan to a person with a higher credit score at a lower interest rate because they view them as lower risk. On the other hand, the Consumer Financial Protection Bureau defines its risk-based pricing with higher risk borrowers who have a lower credit score and they will likely be quoted a higher interest rate.