Interest Rates - Pricing and FICO score effects
Interest rates have a significant impact on the cost you pay for borrowing money. Lenders set interest rates (the APR or annual percentage rate) based on the risk you pose. The higher credit risk you appear to be, the higher your interest rate will be.
The reason is because to arrive at the final rate that can be offered to a borrower, lenders use various risk-based and other pricing adjustments, such as but not limited to the following:
- Loan amount
- Loan term
- Loan-to-value (LTV) ratio
- For a refinance – whether it’s a “cash-out” or a “rate/term” refinance
- Credit score
Below are 30-Year-fixed Interest rates based on a 30-day lock period:
| Rate (%) | 30-Day Lock Pricing (%) |
|---|---|
| 4.875% | (5.422) |
| 4.750% | (4.927) |
| 4.625% | (4.800) |
| 4.500% * | (4.009) * |
| 4.375% | (3.524) |
| 4.250% | (3.070) |
| 4.125% | (2.623) |
| 4.000% | (2.086) |
| 3.875% | (1.471) |
Note: numbers in (parenthesis) are credits that lender will give borrower towards closing costs. Form these numbers, you will subtract the Pricing Adjustments from the table below in order to arrive at the Net Interest Rate and Net credit amount.
Let’s assume Borrower A and Borrower B are both purchasing a home with the same terms below and that they like to have a higher rate (4.5% in this case) in exchange for receiving lender credit towards their closing costs, rather than getting a lower rate and having to produce more funds to close.
Purchase details:
| Loan type | Conventional |
|---|---|
| Purchase price | $400,000 |
| Down payment | $20,000 (5%) |
| Loan amount | $380,000 |
| Loan term | 30 Year Fixed |
| Loan to value (LTV) | 95% |
| Interest rate | 4.500% |
The only difference:
Borrower A
(b-A) – has a credit FICO score of 620
Borrower B
– (b-B) has a credit FICO score of 720
Pricing Adjustments:
| LTV | Credit Score <620 | Credit Score 620 - 639 | Credit Score 640 - 659 | Credit Score 660 - 679 | Credit Score 680 - 699 | Credit Score 700 - 719 | Credit Score 720 - 739 | Credit Score >=740 |
|---|---|---|---|---|---|---|---|---|
| <=60% | N/A | 0.500 | 0.500 | 0.000 | 0.000 | 0.000 | 0.000 | 0.000 |
| 60.01 - 70 | N/A | 1.500 | 1.250 | 1.000 | 0.500 | 0.500 | 0.250 | 0.250 |
| 70.01 - 75 | N/A | 3.000 | 2.750 | 2.250 | 1.250 | 1.000 | 0.500 | 0.250 |
| 75.01 - 80 | N/A | 3.000 | 3.000 | 2.750 | 1.750 | 1.250 | 0.750 | 0.500 |
| 80.01 - 85 | N/A | 3.250 | 3.250 | 2.750 | 1.500 | 1.000 | 0.500 | 0.250 |
| 85.01 - 90 | N/A | 3.250 | 2.750 | 2.250 | 1.250 | 1.000 | 0.500 | 0.250 |
| 90.01 - 95 * | N/A | 3.250 (b-A) | 2.750 | 2.250 | 1.250 | 1.000 | 0.500 * (b-B) | 0.250 |
| 95.01 - 97 | N/A | 3.500 | 2.750 | 2.250 | 1.500 | 1.500 | 1.000 | 0.750 |
The rate of 4.5% offers a base credit of (4.009) which is $15,234.20.
Below you will see what effect your FICO score has on the rate pricing and the net lender credit that you would receive:
| Base Credit (%) | Base Credit Amount | (Less) Pricing Adjustment (%) | Pricing Adjustment Amount | Net Credit (%) | Net Credit Amount | |
|---|---|---|---|---|---|---|
| Borrower A | 4.009 | $15,234.20 | 3.250% | $12,350 | 0.759 | $2,884.20 |
| Borrower B | 4.009 | $15,234.20 | 0.500 | $1,900 | 3.509 | $13,334.20 |
As you can see – the difference in lender credit is HUGE!
Whether you are a future buyer or a borrower looking to refinance your current loan, we can assist you in going over your credit report to see what can be done to bring your credit score higher and be able to get the best rate possible. No need to rush into the process. It just takes some effort on your part but well worth it!
Note: These interest pricing tables are for illustrative purposes only and do not reflect current rates.
