Today, conforming loans are very different than they used to be. Fannie and Freddie have been taken over by the government, and the government doesn’t want them getting silly with taxpayers’ money (any more). So, they have implemented what is known as risk-based pricing. Risk-based pricing is similar to what your auto insurer does–if you drive a little red sports car and are on a first-name basis with your local traffic judge, expect to pay a lot more for your policy than your little old neighbor who only drives her Buick to church on Sundays.
If You Are Fast and Furious with Credit, Expect to Pay More for a Mortgage Refinance
If you’re as careful with your money as a stunt driver is with his femurs, your FICO score will reflect it–and you’ll pay a surcharge for your next home loan. How much can a single indiscretion cost? A lot. According to Fair Isaac, the company that owns the FICO credit scoring model, a person with a 680 credit score who misses a single payment (pays more than 30 days late) will take a 60 to 80 point hit. What does that do to the cost of your mortgage? Let’s ask Fannie Mae.
Fannie Mae’s Loan Level Pricing Adjustment Matrix (aka, the Chart of Doom)
If you have a strong heart, take a look at this little chart of Fannie Mae’s (and yes, Freddie Mac has one, too). Before you messed up and missed a payment, your 680 credit score was good enough to get you a an 85% refinance with total surcharges of 1.375%–a 1% charge for a credit score less than 720, a .250% adverse market delivery charge, and a .125% minimum mortgage insurance charge. But once that late payment hits, your score drops to between 600 and 620. Assuming that it only drops to 620, your increased costs are as follows: You still have the adverse market delivery charge, but your credit score surcharge increases to a whopping 3%, and your MI charge increases to 1.75%, for a grand total of 5% in fees. On a $400,000 mortgage, that single late payment could cost you an extra $14,500 (that’s 5% - 1.375% * 400,000)!
So, if you’re thinking about refinancing a mortgage, check your credit first. You can get a report for free, but spend a little extra to get your scores too. Then you’ll know if a refinance today is a smart decision, or if you need to pay your bills on time for a few months and get your credit score back up.