Rate watchers are eagerly keeping tabs on mortgage interest rates, as they continue to slide. The 30-year fixed-rate fell to 3.07% over the Fourth of July weekend, another milestone low, according to Freddie Mac. But the reality is not everyone will qualify for a mortgage rate that low.
Credit score and down payment are both significant factors in the rate you get, but so is where you live and which lender you choose. A recent report by Haus, a home-financing startup, showed that getting a low rate was not entirely dependent on your credit profile.
“Lenders look at FICO scores to help determine interest rates. Financial prudence is going to be wrapped up in credit score. But where you live and which lender you use is also going to have an impact on your rate,” says Ralph McLaughlin, chief economist at Haus.
The report, which is based on Haus’ analysis of more than 8.5 million mortgage originations between 2012 and 2018 of borrowers with the same down payment, existing debt and credit score, produced two compelling results:
Who you choose as your lender could impact your mortgage rate by three-quarters of a percentage point.
Where you live matters, as there was more than a third of a percentage point difference in rates across metropolitan areas.
Here we’ll look at what those results mean for today’s borrowers and what you can do to improve your chances of getting a low rate as quickly as possible.
How Comparison Shopping Can Save You Money
All things being equal, borrowers who shopped around for a mortgage rate likely got a better deal than those who went with the first lender they found. Among mortgage lenders, there was a 75 basis point (bps) difference between rates, the report shows. A basis point is one one-hundredth of a percentage point. So, as an example, the same borrower would get a 3.25% interest rate with the least expensive lender compared with a 4% interest rate with the most expensive.
Without considering other housing costs (property taxes, homeowners insurance) or down payment, the difference in total interest paid between a 30-year fixed-rate mortgage with a 3.25% rate and a 4% percent rate on a $300,000 home is $46,000. The person with the 3.25% mortgage interest rate also will pay about $122 less each month.
“One of the biggest takeaways from this report was the enormous spread between rates different lenders offer,” McLaughlin says. “If you’re a homebuyer or refinancing your mortgage and you want to get the best rate fast, [the key is] not going to be to improve your credit score, unless you have a bunch of cash to pay down debt. Shopping around is what will help you immediately.”
According to the report, the lenders with the lowest rates were New York Community Bank and Chicago Mortgage Solutions (operating as Interfirst Mortgage Company), coming in 75 bps lower than their costliest counterparts, which were Citizens National Bank and Texas Capital Bank.
5 Least Expensive Mortgage Lenders
New York Community Bank
Chicago Mortgage Solutions
USAA
PHH Mortgage
Provident Funding
5 Most Expensive Mortgage Lenders
Citizens National Bank
Texas Capital Bank
Plaza Home Mortgage
Pacific Union Financial
GMAC Mortgage
Metro Areas with More Banks Offer Lower Rates
Along with shopping around, where you live can affect your interest rate. Borrowers in metropolitan areas with a dense concentration of banks typically received a lower interest rate than their counterparts in areas with fewer banks, according to the Haus report. The difference between the areas with the highest concentration of banks and the lowest was about 35 bps.
Dubuque, Iowa; Springfield, Illinois and Lima, Ohio had the cheapest mortgage rates while Sandusky, Ohio; McAllen, Texas and Danville, Virginia were among the most expensive places for home loans.
“If there’s less competition in an area banks can afford to raise their prices without losing business,” McLaughlin says. “This is especially true if borrowers choose to use local, brick-and-mortar banks rather than online banks, for example.”
Another reason why areas with fewer banks might charge more is that these areas are likely rural or away from urban cores, where home prices are lower, McLaughlin says.
Loan size affects interest rates based on two main factors: mortgage processing costs and risk. Smaller loans offer less exposure to banks, but they can be more costly.
“While smaller loans generally are less risky, the profit from a larger loan will be considerably more, which will cover the mortgage processing costs,” says Joseph J. Zoppi, vice president at New Jersey-based Templar Real Estate Enterprises. “On a smaller loan, this is not possible so the lender will charge a high rate or additional fees to cover the mortgage processing cost.”
For folks in areas where mortgage rates are several basis points higher than the national average, go beyond brick-and-mortar banks. Online lenders are accessible from anywhere and might offer a more competitive rate than what’s available locally.
“Don’t be afraid to use banks you’ve never heard of. So long as the rates are good, the fees reasonable and terms fair, there won’t be any issues,” says Leslie Tayne, founder and head attorney at Tayne Law Group in New York.
How to Shop Around and What to Ask Lenders
The first step in getting a competitive rate is to know what the national average for mortgage rates are. There are different rates for different types of mortgages. The most common mortgage, a 30-year fixed-rate, usually has a higher interest rate than home loans with shorter terms, such as 15-year fixed-rate mortgages.
The national average will give you a target to aim for. Because your credit score and down payment have the most influence on the rate you get, be sure you factor those in when you’re comparison shopping.
“The difference between a good and bad credit score may be reflected in the rates you’re quoted, with less favorable credit scores sometimes resulting in a 1% or more increase to your rate,” says Chris de la Motte, president of Simplist, a digital mortgage marketplace.
Start by contacting financial institutions you already have a relationship with, as you might qualify for certain discounts. Consider including online banks and mortgage brokers in your research as this will give you a broader reach.
Brokers have access to several lenders so they can offer you a variety of options without requiring you to spend a lot of time gathering quotes. However, mortgage brokers charge a fee for their service—typically between 1% and 2% of the loan amount.
Keep in mind, the cost of your loan includes more than just your interest rate. It also includes closing costs, any discount points and loan origination fees. The total cost of your loan is reflected in the APR, or annual percentage rate. The APR will vary by lender, which means two lenders can offer the same interest rate but one might charge higher fees, which raises the cost of your loan.
“It’s possible to negotiate your mortgage rate, but it’s not as simple as trying to bargain for a better rate. You will need to demonstrate that you’re creditworthy of the lower rate. It’s sometimes easier to negotiate some of the lending fees, which can total in the thousands,” Zoppi says.
In the past, a credit rating was only important when borrowing money. Things have changed, but a good rating is still free
Author of the article:
Scott Hannah
Letting your credit rating get out of hand can have major repercussions, but there are solutions.Getty Images
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Q: My partner and I are having a disagreement about credit ratings. We came into a little bit of money and it’s enough to either pay off our line of credit or save for a special trip as soon as we can travel again safely. My partner says we should pay off our credit line so that we not only have a cushion, but it will help our credit rating. He’s really concerned because when he was in university and had some trouble with debt, he felt like his bad situation only got worse because he had bad credit. I think that with so many people having lost their jobs due to the pandemic, the consequences of having a bad credit rating right now won’t be that bad because we’re all facing the same thing. We are due a honeymoon and I want to save the money for a trip because it’s the only way we’ll ever be able to go. Who’s right? ~Ross
A: Credit ratings are one of those things that most Canadians would like to know more about, but the more they learn, the more questions they have. And answers often aren’t straightforward due to the complexity of the credit scoring system. However, I’d be remiss if I didn’t commend you and your partner for having these conversations about your finances. Even if you can’t agree on everything, just talking about possible options is already more than what many couples are able to do.
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When it comes to financial decisions and debates about credit, it’s best if I steer clear of taking sides. Most of us know there are hidden perks when we have good credit; but having bad credit, it can cost us in ways we never realized. To help you both achieve a win-win, here are things to consider as you make decisions for your financial future.
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The perks of having a good credit rating
A good credit rating allows a lender to offer you a better interest rate and terms and conditions. It can make you eligible for a low-interest credit card. When you’re buying a new car at a dealership and your credit score is very high, the financing incentives can include zero per cent interest with payments spread out over an additional year or two.
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When it comes to a mortgage, a high credit rating can result in added buying power with steeply discounted interest rates and a slight easing of qualification criteria. A solid credit rating means you are able to obtain a new cellphone with a plan on contract, rather than having to pay for a device yourself first. It means your home utilities will be connected without an upfront deposit. A good credit rating means you don’t have to worry you’ll be declined whenever someone requests that you consent to a credit check.
As you may be able to guess, a bad credit rating will limit you in terms of how much money you are able to borrow, what interest rates you’ll be charged, and what the repayment terms and conditions will be. When your credit score drops below a certain point, you are no longer eligible for low-interest credit cards and credit card instalment offers for larger purchases. Your interest rate will even go up by as much as five per cent if your credit card payments are late. Unsecured lines of credit may not be available at reasonable interest rates, if at all, and other restrictions — e.g., co-signers, guarantors or collateral — might be necessary for other types of loans.
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The impact of a bad credit rating on mortgage payments
When it comes to a mortgage, a credit report with a few small collection items and a record of late payments could add as much as two additional percentage points to the interest rate. That will not only decrease your buying power, it will dramatically affect how much interest you pay over the term of the mortgage.
For example, a $350,000 mortgage with a payment based on two per cent (five-year term, 25-year amortization), the base monthly payment would be $1,482. Over the course of the five-year term, this mortgage holder would pay $32,120 in interest, along with payments on the principal.
If this same borrower would have to make payments based on four per cent instead of two, the base monthly payments would increase by $359 to $1,841 and the interest paid over the five-year term would more than double to $65,153! The additional interest takes money away from being able to afford other goals. Here’s a simple mortgage payment calculator to try calculations for your own circumstances.
A bad credit rating affects more than credit applications
It used to be that a credit rating was only important when you applied to borrow money, but things have changed. A poor credit check could cost someone their dream job. Many employers ask potential employees to consent to a credit check as part of the hiring process. While they screen for a number of criteria, if someone has filed for bankruptcy, it could preclude them from working in certain industries.
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Landlords also routinely ask potential tenants to consent to credit checks as part of the screening process. Those who have trouble paying their bills on time could have trouble paying their rent. Landlords may also fear that someone with prior obligations, e.g., significant vehicle payments or family maintenance arrears, might not be able to afford the rent along with their living costs.
As financial institutions do as well, it’s up to each landlord and employer to interpret the credit checks based on their own criteria. This means that if you need to explain your situation, it might be best to do it before they check your credit.
What does it cost to have a good credit rating?
With all the drawbacks that come with having a bad credit rating, you might wonder what it costs to have a good rating. A good credit rating doesn’t cost you anything — and it will save you money in the long run. All that’s required is that you engage in positive credit behaviours. Here are five tips to do just that:
1. Make your payments on time
On-time payments can be for the full amount that’s owing, or the required minimum payment. One of the most significant ways to protect your credit rating is to pay at least your minimums on time every month. In order to do this, you need to live according to a realistic budget and spend below your means so you’ve got enough money to bring down what you owe.
2. Plan for the unexpected – watch your credit utilization rates
Any balances you do carry on credit cards and lines of credit, aim to keep them below about 65 per cent of the limit on each account. That way if something unforeseen happens, you’re not left in the lurch trying to make bigger payments than you can reasonably afford.
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3. Demonstrate how you manage during the good times and the bad
Time provides a true picture for how responsible someone is with their money and credit. Aim to keep one older account active so a potential lender can see how you manage your affairs. If you’ve had some late payments within the last six to seven years, if they are still reflected on your credit report, they will be less significant than all of the more recent payments you have made on time to recover from the past difficulties.
It’s natural in life to hit some financial bumps, and the longer you use credit the more likely it is that there will be some reflected on your credit report. Some ways of dealing with financial trouble wipe the slate clean, which is why lenders look at your overall financial picture as part of a credit application. A balanced approach tends to be the strongest: spending within your means and based on a steady source of income, using credit wisely, managing routine payments and obligations, saving in proportion to your level of income, and having some assets to show for your spending. It raises red flags if someone has been actively using credit for a number of years, but their credit report offers no meaningful information about their credit accounts.
4. Only keep and apply for the credit that you actually need
We all know that person who has so many credit cards in their wallet that it hardly closes. But a lot of credit doesn’t necessarily mean they have a good credit rating. In fact, it could signal a problem. Only apply for credit that you actually need and will use.
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Pay off and close any accounts you don’t use regularly and don’t really need. This protects you from giving in to temptation simply because you have credit available to you. It also protects you from fraudulent activity on an account you don’t use regularly. The first thing a fraudster would do is change your address and contact details so you don’t get their bills. By the time you’ve caught on to their spending spree, the damage could be done.
5. Not all credit is created equal
When there isn’t much to report on your credit file, potential lenders and interested parties might look more closely at the types of debts you do have. Different types of credit shed light on how you handle your money overall. For example, deferred interest or payment plans can indicate you aren’t able to save up for purchases ahead of time. Consolidation loans mean you’ve had difficulty paying your debts in the past. A line of credit is a revolving form of credit, like a credit card, and it’s easier to get into trouble with a revolving form of credit than with an instalment loan, where you make payments for a set period of time and then it’s paid in full.
How to deal with debt and save for a goal
When faced with a sum of money you weren’t expecting, consider how to make it work hardest for you toward your most meaningful goals. Pay off an expensive debt and then keep making the payments you were making on that debt into a savings account instead. You’ll save money on interest by paying off the debt offand also be able to save up for an important goal. This is a particularly effective strategy when interest rates on saving accounts are as low as they are now.
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If you have more money than what’s needed to pay off an expensive debt, consider whether it’s better to pay down another debt with the leftover sum, or to jump-start a savings account with it. If you have quite a few debts to take care of and not enough money to pay them all off, consider how best to use the sum you received while employing the snowball or avalanche method of debt repayment. Just be sure to execute your debt repayment plan within a realistic budget that also accounts for some savings. That will protect you from relying on credit and seeing your progress evaporate should you face an unexpected expense.
The bottom line on what your credit rating means
The best things in life are free, and this certainly applies to having a good credit rating — especially when you consider how painfully expensive the alternative is. No one thinks about what a bad credit rating will cost until they’re faced with the consequences. Only by then, it’s often too late to turn things around quickly. While negative information on your credit report is frustrating, with some patience and corrective steps, time is on your side to (re)build an excellent credit rating.
Scott Hannah is president of the Credit Counselling Society, a non-profit organization. For more information about managing your money or debt, contact Scott byemail, check nomoredebts.orgor call 1-888-527-8999.
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Our goal here at Credible Operations, Inc., NMLS Number 1681276, referred to as “Credible” below, is to give you the tools and confidence you need to improve your finances. Although we do promote products from our partner lenders who compensate us for our services, all opinions are our own.
The latest trends in interest rates for student loan refinancing from the Credible marketplace, updated weekly. (iStock)
Rates for well-qualified borrowers using the Credible marketplace to refinance student loans into 10-year fixed-rate loans continue to stick at record lows during the week of May 10, 2021.
For borrowers with credit scores of 720 or higher who used the Credible marketplace to select a lender during the week of May 10:
Rates on 10-year fixed-rate loans averaged 3.60%, the same as the week before and down from 4.35% a year ago. This marks the second week that rates have not budged from 3.60%, the record low set last week.
Rates on 5-year variable-rate loans averaged 3.18%, down from 3.19% the week before and up from 3.03% a year ago. Variable-rate loans recorded a record low of 2.63% during the week of June 29, 2020.
Student loan refinancing weekly rate trends
If you’re curious about what kind of student loan refinance rates you may qualify for, you can use an online tool like Credible to compare options from different private lenders. Checking your rates won’t affect your credit score.
Current student loan refinancing rates by FICO score
To provide relief from the economic impacts of the COVID-19 pandemic, interest and payments on federal student loans have been suspended through at least Sept. 30, 2021. As long as that relief is in place, there’s little incentive to refinance federal student loans. But many borrowers with private student loans are taking advantage of the low interest rate environment to refinance their education debt at lower rates.
If you qualify to refinance your student loans, the interest rate you may be offered can depend on factors like your FICO score, the type of loan you’re seeking (fixed or variable rate) and the loan repayment term.
The chart above shows that good credit can help you get a lower rate and that rates tend to be higher on loans with fixed interest rates and longer repayment terms. Because each lender has its own method of evaluating borrowers, it’s a good idea to request rates from multiple lenders so you can compare your options. A student loan refinancing calculator can help you estimate how much you might save.
If you want to refinance with bad credit, you may need to apply with a cosigner. Or you can work on improving your credit before applying. Many lenders will allow children to refinance parent PLUS loans in their own name after graduation.
How rates for student loan refinancing are determined
The rates private lenders charge to refinance student loans depend in part on the economy and interest rate environment but also the loan term, the type of loan (fixed- or variable-rate), the borrower’s credit worthiness and the lender’s operating costs and profit margin.
About Credible
Credible is a multi-lender marketplace that empowers consumers to discover financial products that are the best fit for their unique circumstances. Credible’s integrations with leading lenders and credit bureaus allow consumers to quickly compare accurate, personalized loan options ― without putting their personal information at risk or affecting their credit score. The Credible marketplace provides an unrivaled customer experience, as reflected by over 4,300 positive Trustpilot reviews and a TrustScore of 4.7/5.
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They can help connect you to lenders that offer loans that may work for you. Their lender network includes state and Tribal lenders. Tribal lenders’ rates and fees may be higher than state-licensed lenders and are subject to federal and tribal laws, not state laws. Your credit history may impact whether a lender offers you a loan and the terms of your loan, but some lenders in our network may offer loans to borrowers with all types of credit.
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