Borrowers who seek lower loan costs by raising credit scores see benefits fall off at top end

Benefit of higher credit score dwindles at top end

NEW YORK —

Have you been working to boost your credit score before trying to get a mortgage? It may not yield the payback you expect.

The mortgage loan interest rates offered to borrowers with stellar FICO scores aren’t much lower than the rates offered to those with a middle-of-the-road 720 score these days.

That means that efforts to drive up a credit score to lofty heights aren’t likely to produce substantial savings over the life of the loan.

The real savings comes from getting your score to that magic line of 720.

An analysis of interest rate quotes made through real estate website Zillow.com during the first half of September found that prospective borrowers with FICO scores of 620 or below aren’t likely to get any mortgage offers. “These lenders are really not looking at people under 620 at all,” said Stan Humphries, chief economist for Zillow.

That means well over a quarter of U.S. adults have little or no access to mortgage loans right now, based on the most recent distribution of scores provided by FICO. That’s because credit remains tight and banks, which have written off billions in bad loans in the past three years, are trying to keep their risks low, so they’re bypassing the diciest borrowers. “As the housing market continues to improve over the next five years, then this situation will also change,” Humphries predicted.

For potential borrowers with scores between 620 and 720 — roughly another quarter of U.S. adults — the lowest annual interest rate offered by lenders through Zillow.com shows the impact a few credit score points can have.

— For scores between 620 and 639 the best average annual percentage rate offered was 4.9 percent.

— For scores between 640 and 659, the rate was 4.73 percent.

— For scores between 660 and 679, the rate was 4.6 percent.

— For scores between 680 and 699, the rate was 4.56 percent.

— For scores between 700 and 719, the rate was 4.44 percent.

— For scores of 720 and above, the rate was 4.3 percent.

That means that for each 20-point score increase, the average rate dropped 0.12 percent. On a $300,000 home with a 20-percent down payment, a 0.12 percent decline equals about $6,400 saved over the course of a 30-year mortgage, according to Zillow. The company looked at 25,000 loan requests and the quotes they garnered from its pool of 1,000 lenders to come up with its data.

“If you’re between 620 and 720, you should be killing yourself to get every point you can,” Humphries said.

But if you’re already at 720, the benefits start to dwindle as you improve your score further. There are still incremental rate reductions for borrowers in the higher range, but they won’t see the same level of drop-off that improvements lower on the scale can produce.

Part of the reason for so little change for the top borrowers is that interest rates are so low overall. “There’s not that much room right now between the rates,” noted Diane Winland, a financial planner with Financial Finesse, based in Manhattan Beach, Calif.

Another potential factor is that consumers with “perfect” credit scores tend to be less profitable for banks than consumers with a few dings on their histories, who pay higher rates and often penalties like late fees.

Consumers with great scores by and large avoid credit, explained John Ulzheimer, president of consumer education for the website Credit.com. “They have credit, they have had credit for a very long time, but they’re definitely a small-time user of credit. Which means that they’re not very profitable.”

The current situation means that potential mortgage applicants need to carefully evaluate their current standing and their goals before taking any steps.

Someone with a low credit score should work to improve their credit report before applying. “There’s lots of things people can do in a short period of time to go up 10 points,” said Todd Marks, vice president of education at the Consumer Credit Counseling Service of Greater Dallas.

But someone who already has a relatively high score may not benefit enough from an improved score to make delaying a home purchase worthwhile. “I always tell people, don’t get greedy,” Ulzheimer said. A rate in the low 4-percent range is still very good by historic standards, he noted. “In the grand scheme of things, it does not pay to wait.”