Borrowers Pay Themselves Twice with Credit Optimization

Are you one of the 50% of mortgage borrowers who apply with multiple lenders in pursuit of the best rate and terms? If so, you’re not alone.

We recently surveyed borrowers and found that half believe applying with several lenders is the key to securing the most favorable mortgage deal.

However, this blind crusade often fails to yield the desired results. Applying with multiple lenders can be costly for borrowers and even more so for lenders. But here’s the worst part – this mindset overlooks the most effective way to guarantee the best mortgage rate: achieving the highest possible credit score.

Enter credit optimization – a proven strategy that empowers borrowers to secure the best mortgage rates while saving time and money. By focusing on improving your credit score, you can unlock access to the most competitive rates and terms while setting yourself up for a score of other benefits that come with a high credit score.

Can you really get a better deal with less work?

Yes! Let me explain.  For the most part, there are two factors in a mortgage application that determine the rate the borrower will pay.

• Loan-To-Value Ratio (LTV)

One of the two factors is loan-to-value (LTV), the ratio of the loan amount to the value of the house being purchased or refinanced.  The lower the LTV the better as far as rates are concerned.

The trouble is, there’s not much anyone can do about the loan-to-value.  The house being purchased or refinanced has a fairly static value during the mortgage origination cycle.  It is, therefore, what it is.

• Your Credit Score

Credit score is the second factor that determines mortgage rates – and it’s the one you have the most control over.

Unlike the LTV, credit scores are dynamic.  Think about this impressive stat – 74% of all borrowers, regardless of initial credit score, can optimize – increase – their credit scores by at least one 20-point band within 30 days, easily during the mortgage origination cycle.

Sure, credit optimization typically requires borrowers to invest some of their cash to reduce credit card debt.  Note the word ‘invest.’  But putting in the effort reducing credit card debt quickly benefits borrowers in at least two ways:

1. Reduces Credit card interest.  Investing cash to reduce credit card debt immediately reduces the amount of interest on that credit card debt.
2. Increases Credit Scores. As your credit score increases, your mortgage rate decreases.  Credit scores increase enough to reduce mortgage payments, which increases borrower cash flow AND reduces the interest the borrower will pay on their mortgage immediately and over the life of the loan.

Sense a theme here? Investing in reducing credit card debt reduces credit card interest AND mortgage interest.

And there you have it. Credit optimization is the simplest possible way borrowers can pay themselves twice.

The traditional way that borrowers don’t like.

Borrowers are often presented with another way of reducing the interest rate on their mortgage: discount points. 

The concept behind discount points is simple (and probably why so many choose this route.):  pay one point, equal to 1% of the mortgage amount, and the mortgage rate drops by 25 basis points or one-quarter of one percent.

The fact is most borrowers hate points.  They feel they are already paying their lender enough (more than enough) for their mortgage. Remember, words matter – the process is called ‘paying points.’. Paying points is an expense because points are paid to the lender.

Contrast that with allocating cash to credit card debt, an investment the borrower makes in the future.  Reducing credit card debt is inevitable; borrowers would do it anyway.  Doing so during the mortgage process is simply doing it sooner.

Points, on the other hand, are not inevitable.  Moreover, points are not that beneficial.  An example might be helpful.

Our borrower has two choices to reduce their rate.

• Pay points. Assume the mortgage amount is $360,000 with an initial offer rate of 7.65%, which results in a monthly payment of $2,554.

By paying one point, which costs $3,600, the mortgage rate drops to 7.40%. This decreases the monthly mortgage payment to $2,492, or about $62 per month.

• Pay toward credit card debt. Rather than spending $3,600 on points, the borrower could allocate $4,200 to credit card debt.  Doing so would reduce their mortgage rate to 7.00%, or 65 basis points.

Think about that for a minute.  Reducing a mortgage rate by 65 basis points would mean paying almost 3 points or $10,800, 2.5 times the $4,200 used to pay down credit card debt. The example could stop here.  It is clear that credit optimization and paying points are not equivalent answers to the question of lowering interest rates.  Paying points is expensive.  In this case, points were used 2.5 times the cash to achieve the same rate. Why would anyone pay points when credit optimization is an option?

How Credit Score Optimization is better for consumers

Just in case you still aren’t completely convinced, let’s continue with the example.

Allocating $4,200 to credit card debt increased the borrower’s credit score enough to decrease their rate to 7.00%. In doing so, the borrower’s mortgage payment decreased by $131 per month to $2,395 from $2,526.  They’ll pay far less interest over the 30-year life of the mortgage, about $57,300 less. Yet there’s more.

Within 12 months, the borrower who optimizes their credit score by reducing credit card debt saves $840 in credit card interest. Add that to the monthly savings realized thanks to a lower mortgage payment, and the borrower pockets $2,412 in the first year. This shows how credit optimization is the borrower paying themselves twice.  They reduced their monthly credit card interest and mortgage payments to free up $200.

One more step in the analysis helps drive the value of credit optimization home compared to paying points. Over the lifetime of the loan, where the credit score was optimized, the borrower pays $57,300 less in mortgage interest.  They invested $4,200 of their cash and repaid themselves 13 times over! Paying points?  The mortgage interest saved by paying one point for $3,600 is about $22,200 – or the result of decreasing the mortgage rate to 7.40% from 7.65.  By paying points.  If they went that route, the borrower gets repaid only six times over.

Now for the easiest math: 13 divided by six is a little over 2.0.  It just so happens in this example, and this little bit of math shows that credit optimization truly pays the borrower twice.

The bottom line? Credit optimization is worth every penny.

Some who wander are definitely lost, especially those who wander in search of the best mortgage rate by applying with multiple lenders. Borrowers should find a lender that, in their first encounter, offers credit optimization.  Credit optimization is the fastest path to the best mortgage rate and an excellent investment in themselves. And so much less work for the mortgage borrower. So, why work harder when you can work smarter? Embrace the power of credit optimization and watch as the savings pile up. Your wallet will thank you today – and in the future.