New research conducted on behalf of the National Home Equity Mortgage Association finds that home loan rates directly correlate with a borrower's credit quality.
Based on an analysis of approximately 1 million mortgages written last year, the findings identified FICO credit scores as the biggest influence on borrowing costs. For every 10 points that a borrower's FICO rating went up, the study calculated, the interest rate on the loan dropped about 0.10 percent.
Borrowers with higher credit scores also were more likely to accept a prepayment penalty -- imposed when a loan is repaid too early -- which in turn reduced their interest rates even more, on average, 0.38 percent lower than without the penalty.
Additionally, the research showed that borrowers of owner-occupied housing received better interest rates -- about 62 basis points lower -- than borrowers of non-owner-occupied properties. And customers who fully documented their incomes generally paid a lower interest rate than stated-income borrowers.
Source: Birmingham Business Journal (06/23/05) © Copyright 2005 INFORMATION, INC. Bethesda, MD (301) 215-4688
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