Is This the Best Rate I Can Get with My Credit Score?

By Brandon Cornett
© 2011 All rights reserved

Reader question: "We applied for a mortgage loan about a week ago. The lender has offered us a mortgage rate of 5.1% for a 30-year fixed-rate loan (conventional). From what I've gathered, this is higher than the average rate being given out these days. We are pretty sure we have good credit scores and therefore deserve at least the average rate. Is this the lowest mortgage rate the lender can give us based on our credit ratings?"

What are your FICO scores right now? This is the first thing I would need to know from a troubleshooting perspective. If you feel you're not getting the best rate possible (or even the average rate, for that matter), there must be some reason for it. It's probably either your credit score, the size of your down payment, or the amount of debt you have. Those are the big three "rate killers" for home loans.

Let me start by showing you what you stand to gain with a lower rate. You were right about one thing. The interest rate you've been offered is higher than average. Based on Freddie Mac's weekly mortgage survey, the average rate at the time you sent in your question was 4.88% (on a 30-year FRM).

Here's the difference between 5.1% and 4.88% on a $250,00 loan, spread out over 30 years:

	15-year loan	30-year loan
Loan Amount	$250,000	$250,000
Interest Rate	5.1%	4.88%
Monthly Payment	$1,357	$1,323
Total Interest Expense	$238,654	$226,560

As you can see from the table above, your down payment would only be slightly smaller if you got the average mortgage rate. But you'd pay $12,094 more in interest over the 30-year term of the loan -- if you even stayed in the home that long. Note: These numbers are approximate. Your monthly payments might be higher or lower than this, depending on your property taxes and home-insurance costs.

When asking your question, you said you were "pretty sure" you had good credit. This tells me you haven't actually checked your scores. This is one of the first things you should do before applying for a mortgage loan, or any other major financing. The situation you're in now is that the lender knows more about your credit then you do. How can you negotiate under these circumstances?

If you haven't done so already, go online and request your credit scores. You'll have to pay for them in some way -- they're usually not free, like your credit reports are. But it's worth the price. Remember, you need to know as much as the lender does, if you want to have more bargaining power.

The last time I checked, you could buy two out of your three credit scores through the MyFICO website (www.myfico.com). I believe the cost was around $15 - $20. You might also be able to purchase your scores in conjunction with ordering your credit reports through AnnualCreditReport.com. At the very least, I'm certain you can get your Equifax and TransUnion scores through the FICO website.

Less Favorable Terms = Free Credit Score

There's also a new law in place that could apply to your situation. Basically, if your credit score results in less favorable financing terms (like a higher interest rate), the lender must give you a credit score disclosure statement. This document will tell you what your score is, and how it may have affected you during the mortgage-approval process. It will also show how you compare to other borrowers, in terms of your credit.

You can learn more about these disclosures from ScoreInfo.org.

Ask Your Lender How to Get the Best Rate

If your mortgage lender offered you an interest rate without any type of explanation, you should certainly inquire about it. First, make sure you know what your FICO credit scores are. Then ask your lender if this is the lowest mortgage rate you can get, based on your credit score. Tell him you realize that the rate he's offering is higher than the current average (use Freddie Mac's weekly survey to support this). Find out what factors are causing this, and what you can do about it.

Just because the lender has offered you an interest rate doesn't mean you have to accept it. Along with the actual rate, your lender probably offered a rate-lock period as well. This guarantees the quoted interest rate for a certain period of time (usually 30 - 60 days) while your loan is being processed. It's sort of like a reservation in that respect.

Most people choose to lock in their rate when they're done shopping for rates. But technically, you can still shop around during this period. You might lose your lock-in fee if you jump ship and choose another lender. But that's the worst that can happen.

How Many Other Offers Did You Get?

I recently saw a statistic that said most home buyers choose a mortgage lender based on the advice of their real estate agent. This is certainly the most convenient way to find a lender. But there's one fundamental flaw with this approach. If you go with the first lender you speak to, you won't be able to comparison shop for the best deal.

If you want to get the lowest mortgage rate possible based on your credit score, you'll need to get offers from more than one lender. I call this the rule of threes. Home buyers should get mortgage quotes from at least three lenders before making a decision.

Some lenders will offer slightly lower rates than others, but they'll add extra upfront fees (toward your closing costs). Some lenders will do the opposite, reducing the closing costs while boosting the mortgage rate. You might even be surprised to find that another lender is willing to offer lower rates and lower fees. It happens. But you won't know unless you get a couple of additional quotes.

So let's sum up some of the key points we discussed in this article.

• You need to know what your credit score is before you start shopping for a mortgage. Here's more about that topic.
• You should also feel free to ask the lender if that's the best mortgage rate you can get with your credit rating.
• If you are offered less favorable terms as a result of your credit score, the lender is required to give you a disclosure to this effect. This disclosure will include your credit score, and it will also show you how you compare to other borrowers.
• Lastly, you should not feel obligated to accept an offer that you feel is unfair. Tell the lender you don't think you're getting the best rate based on your credit score, and see what he says about it.
• Talk to a couple of other lenders and see what they're willing to offer.
• Don't lock in the interest rate unless you're sure it's the best one you can possibly get. The lender may require a fee to lock in the rate. It will probably be refunded if you close with that lender, but not if you bail on them.

The difference between a mortgage rate of 5.2% and 4.9% might not look like much on your monthly payment. But when you spread this over the full term of the loan, the difference in interest costs can be measured in tens of thousands of dollars. So it's worth the extra time and homework to pursue the lower rate.