As you know, a few months ago FNMA changed the way they price out mortgages based on your FICO score (credit rating).  The lower your score, the more they charged you. This is referred to as risk-based pricing or tiered pricing.  The bottom line is, the lower your FICO score the higher your interest rate.  Of course, you always have the option of paying points to reduce your rate.

 

Now FHA and the VA (government sponsored) have joined the risk-based pricing club. As of October 1, 2008 (today), your FICO score will cost you the following:

 

FICO score                   cost to you

 

660+                             ¼ point of loan amount bonus

620-639                        ¼ point cost                   

600-619                        ½ pt cost

580-599                    1.5   pt cost

550-579                    2.0   pt cost

 

Just so we are clear, 1 point equals 1% of your loan amount.  As an example 1% of $100,000 is $1,000 cost. You can increase your interest rate to avoid paying points.  Rule of thumb: pay 1 point and reduce your interest rate by ¼%.  If you have a $100,000 mortgage @ 6.25%, you can pay around $1,000 (1%) to reduce the rate to 6%. This works the other way around.

 

Lesson learned:

 

·        know your FICO score now and try to improve it  

·        go to a reputable FHA lender or a bank (I like Wells Fargo)

·        speak to the loan officer about how to improve your score to get up to the next tier

·        negotiate a higher rate to eliminate paying points

 

I am going home!

 

 Dale Siegel