Are you aware that your credit score can determine your mortgage interest rate?
It’s true — lenders adjust the interest rate on your mortgage based on your credit score and your down payment (or equity, in the case of a refinance).
The term for the interest rate adjustment is called "loan-level price adjustment (LLPA)."
Here's a look at how different credit scores impact the the interest rate adjustment for a conventional loan:
| Credit Score | Down Payment or Equity Percentage | |||||||
|---|---|---|---|---|---|---|---|---|
| 40% or more | 30-39% | 25-29% | 20-24% | 15-23% | 10-14% | 5-9% | 3-4% | |
| 740 | 0.00% | 0.25% | 0.25% | 0.50% | 0.25% | 0.25% | 0.25% | 0.75% |
| 720 - 739 | 0.00% | 0.25% | 0.50% | 0.75% | 0.50% | 0.50% | 0.50% | 1.00% |
| 700 - 719 | 0.00% | 0.50% | 1.00% | 1.25% | 1.00% | 1.00% | 1.00% | 1.50% |
| 680 - 699 | 0.00% | 0.50% | 1.25% | 1.75% | 1.50% | 1.25% | 1.25% | 1.50% |
| 660 - 679 | 0.00% | 1.00% | 2.25% | 2.75% | 2.75% | 2.25% | 2.25% | 2.25% |
| 640 - 659 | 0.50% | 1.25% | 2.75% | 3.00% | 3.25% | 2.75% | 2.75% | 2.75% |
| 620 - 639 | 0.50% | 1.50% | 3.00% | 3.00% | 3.25% | 3.25% | 3.25% | 3.50% |
How to Calculate Loan Level Price Adjustment
Let's take a look at an example of how the loan-level price adjustment works.
Let's say you're purchasing a $200,000 home:
- Down Payment: 20%
- Loan Amount: $160,000
- Credit Score: 740
Based on the chart above, your 740 credit score and 20% down payment earns a 0.5% price adjustment.
So, how does that affect your bottom line? To find out, you'll multiple the price adjustment by your loan amount (0.005 x $160,000). The 0.5% price adjustment will increase your closing costs. Ouch!
If the rate adjustment is too much for your budget, your lender could offer you a higher interest rate (about 1/8%) in lieu of the increased closing costs.
The mortgage interest rate adjustments vary from lender to lender and will change over time based on the stability of the mortgage industry.
Expert Tip
Making an extra 1% down payment can actually pay for itself with the loan-level price adjustment.
To find out, ask your lender to give you a rate quote with an extra 1% down payment.
If your interest rate is still exorbitant on a conventional loan, ask your lender to quote you an interest rate on an FHA mortgage.
Multi-unit homes and condominiums also earn a rate increase:
| Property Type | Loan Percentage | |||||||
|---|---|---|---|---|---|---|---|---|
| Multiple-unit property | Less than 60.00% | 60.01-70.00% | 70.01-75.00% | 75.01-80.00% | 80.01-85.00% | 85.01-90.00% | 90.01-95.00% | 95.01-97.00% |
| 2-unit property | 1.00% | 1.00% | 1.00% | 1.00% | 1.00% | - | - | - |
| 3-4 unit property | 1.00% | 1.00% | 1.00% | - | - | - | - | - |
| Condominium | 0.00% | 0.00% | 0.00% | 0.75% | 0.75% | 0.75% | 0.75% | 0.75% |
FHA, VA, and USDA Interest Rate Adjustments
FHA, VA, and USDA mortgages also require interest-rate adjustment — however, the cost is not as severe as the conventional home loans.
Government lenders may increase the interest rate cost for loans that exceed the typical lending limit for the county where the home is located.
Two- to four-unit owner occupied residences and condominiums can draw a modest rate increase.
| FHA, VA & USDA Loans | 30-Year Mortgages |
|---|---|
| Credit Score | Price Adjustment |
| 740 or more | 0.125% |
| 680 - 739 | 0.00% |
| 660 - 679 | 0.25% |
| 640 - 659 | 0.50% |
| Less than 640 | 1.25% |
Jumbo loans, investment properties, second homes, and your specific loan amount can bring on additional price or rate adjustments.
Some lenders also increase the interest rate based on the state.
How to Shop for the Best Interest Rate
Now that you know that interest rates can vary depending on your credit score, down payment/equity, loan amount and other variables, you can shop for the best possible interest rate.
Ask your lender to quote you an interest rate based on your particular situation.