Attractive fixed mortgage rates--which recently dropped to below 5 percent--have triggered a wave of refinancing applications as homeowners look to turn the favorable interest rate trends into real savings. But not all borrowers will be able to get in on the action. Tighter lending standards and falling home prices will prevent some borrowers from obtaining the most compelling rates, while shutting others out of the market altogether.
[Check out Mortgage Rates in 2009: 7 Things You Need to Know.]
To get a sense of what kind of credit profile a borrower needs in order to access today's best rates, I spoke with Chris Freemott, president of All American Mortgage in Naperville, Ill. Freemott passed along this nugget of information that anyone considering refinancing today should be aware of: "[a FICO score of ] 740 is the benchmark for the lowest possible rates," Freemott says.
From our conversation:
"If you have a [FICO score of] 740 or better there is no delivery fee. But as soon as you go below that, you start having delivery fees. And those delivery fees become onerous. The 720 credit score used to be historically thought of as a very good credit score. Today, however, [if you have a 720 credit score] Fannie and Freddie hit you with a 50 basis point--going to 75 [basis points] as of March 9--delivery fee."
I had always assumed that a 720 FICO score was the benchmark. But from what Freemott is saying, 740 is the new 720, so that's what you'll need if you want to take advantage of these historically low interest rates when you refinance. If you don't have a 740 FICO score you can still refinance, you're just more likely to get a higher rate. Unfortunately, that could reduce the savings to a level where it's not worth refinancing at all.