Low-credit borrowers see wide mortgage rate spreads
It’s no secret that shopping around for your mortgage rate can save you big. But if your credit score is on the lower end? New data shows it can save you even more.Verify your new rate (Jul 11th, 2020)
How credit score impacts the mortgage rate spread
According to a new analysis from Zillow, the gap between highest and lowest mortgage rate quotes is widest for lower-credit score borrowers. In fact, for borrowers with scores between 620 and 639, quoted mortgage rates varied by as much as 133 basis points — or 1.33 percent — between lenders.
To put this into perspective, our mortgage calculator shows that on a home priced at $250,000, a 4 percent interest rate would mean a monthly payment of $955 per month. At 1.33 percent higher? You’d pay $1,090 — nearly $100 more. That’s $1,200 a year (and significantly more paid toward interest.)
Borrowers with prime scores (760 or higher) still see their mortgage rates vary by lender, but not as widely. This cohort sees a spread of about 92 basis points, or 0.92 percent.
As Zillow’s research team concludes, “Clearly, it benefits borrowers of all types to explore their options before committing to a loan. But shopping around may have the most benefits for those borrowers with the lowest credit scores, since they’re most likely to see the biggest differences between the lowest and highest rates they’re offered.”
Loan type and location matter, too
What type of loan you apply for can also impact how much your mortgage rates diverge. Borrowers applying for VA loans see the widest rate spread, with quotes varying as much as 109 basis points or 1.09 percent.
Conventional loans vary as much a 0.97 percent, while jumbo loans vary up to 0.86 percent, the analysis found. Jumbo VA loans see the smallest rate variance among lenders.
The market you’re buying in also plays a role, with rate spreads the widest in Baltimore, San Francisco, Dallas, Seattle and Los Angeles.
In Baltimore, borrowers with credit scores under 680 can see a rate variance as big as 1.55 percent — the largest among all major metros.Verify your new rate (Jul 11th, 2020)
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