Low FICO Scores Magnify Interest Rates
Mortgage Rates Rise as FICO Score Fall.
The competition among lenders for the best loan applicants is fierce. The best loan applicants have a FICO score of 800 or better. If you're in this very exclusive club, consider yourself a financial rock star. With only 13% of the credit worthy population with this score, this low supply creates a huge demand by lenders. This is just another instance of the "law of supply and demand".
And just like real rock stars, having a high FICO score can garnish you some pretty nifty perks. Compared to your score, a person with a FICO score of 760 can qualify for an interest rate of about 6% on a 30 year fixed-rate mortgage. This rate can increase to about 7.5% if the score is between 620 and 639.
What about the rock star wannabes? Do they get serviced? Yes but at a higher cost. For example, on a 30 year $216,000 fixed rate mortgage, they have to pay about $2,724 extra a year because of their lower score.
And the credit score impaired, what about them? How much do they have to pay to borrow money? With a credit score of 620 you are solidly stamped as a bonafide financial risk and most lenders will need an "incentive" to make it worth their while. How much you is that incentive, you ask? Well, an extra 3% to 6%.
With a score lower than 620, you are considered a high risk applicant. There isn't much of a chance at this level. You're best bet is to go on a drastic and self imposed financial debt diet and begin to pay off all those outstanding debt
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