Monday, May 19, 2008

The New Mortgage Rate Calculus

In my previous article I talked about the swinging pendulum of credit, it appears to be easing slightly - however it is also being re-priced. What does that mean? The chart to the left shows how much extra you'll pay for a mortgage if your FICO score is below 720 - it can get pretty hefty. I think these fees will come down, but it shows the direct correlation between Risk and Return - the riskier the borrower, the heftier the fees and the higher the rate the borrower will pay. Perhaps the market is starting to figure out that a person with no income and a poor credit score isn't the same risk as a person with money in the bank, a steady job and pays their bills on time.

The higher fees will hurt, but hopefully they will serve their intended purpose, encouraging more borrower responsibility and being compensated for risk.

Scott Dauenhauer