As buyers prepare to make a purchase, one of the first things they seek to improve is their credit score in the hopes they’ll receive a favorable mortgage rate. However, digital mortgage marketplace OwnUp’s latest study published on Thursday revealed a great score doesn’t guarantee a low rate.
“When you’re applying for a mortgage, if you have a high credit score, you are often able to qualify for a lower interest rate, as the lender sees you as a low-risk, reliable borrower,” the report read. “They are willing to give you a better deal, knowing you’re likely to pay your bills on time.”
The report noted although lenders use the same four criteria to evaluate homebuyers (e.g. capacity to repay loan, capital, collateral, credit) they all have additional, individual metrics they use to determine what rate to offer. The housing type (e.g. condo vs. single-family home), ZIP code and specific loan product the buyer is applying for have a major impact on the final rate.
Although the difference seems inconsequential, the report said the rate spreads can add five figures in interest over the life of a loan, even for buyers with stellar credit profiles.
“Even a quarter of a percentage point can mean tens of thousands of dollars over the life of the loan,” the report explained. A general rule of thumb is that the difference in interest across the range is equal to roughly 10 percent of the price of the home.”
“For example, if you buy a home for $400,000, a great rate will save you $40,000 over a bad rate,” it added.
Furthermore, OwnUp said a buyer with an average credit score who takes time to shop and negotiate mortgage rates can save more money in interest payments than a buyer with an excellent credit score who accepts the first rate they’re given.
“Armed with this information, a borrower with poor credit, but who shops around and negotiates well during the home financing process, can save tremendously on the interest payments over the life of their loan,” the report said. “Illustrated by this graph, a borrower with poor credit, but who secures a low-interest rate by negotiating, will save $37,000 dollars over the life of their loan, as compared to a borrower with strong credit, who gets locked into a bad rate.”
The report noted the importance of taking the time to shop for mortgage rates, even in a rapid-fire market where buyers feel pressure to secure lending as soon as possible so they can nab a home. “As borrowers near the finish line of a long homebuying journey, they tend to focus on simply securing their purchase and getting approved for the mortgage,” it read. “They can feel rushed or overwhelmed, or they can be relying on a trusted referral from a friend or a realtor or a big brand name.”
Although the process of shopping for 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 total life of your loan, and that translates into significant savings for things like retirement or building a nest egg for college,” the report concluded.