RISK-BASED PRICING: Who Really Benefits?

Many mortgage companies, financial institutions, and other lenders price loan rates based on two factors: length and borrower risk. The borrower risk portion of this equation considers several pieces of information including credit score, employment status, loan amount, and borrower assets. The riskier the borrower appears, the greater the rate. If you have ever experienced the high end of this pricing, the sticker shock can be heart-stopping. I recall my first auto loan, where the lender explained my rate could come in around 4.5% or 5%. Instead, as I had very little credit history, the rate came in well north of 6%. It was rather frustrating, and it felt like the financial institution punished me for not having borrowed much to that point. Perhaps you have had a similar experience.

At Farmers and Mechanics, we believe this pricing strategy poses too much risk of harm to the borrower, as it segregates borrowers by class and unduly burdens the least well off and least credit-experienced borrowers. In the extreme, it can cause otherwise qualified borrowers to no longer be qualified, cutting off vital opportunities for home ownership.

Risk-based pricing can also make it very difficult for the borrower to shop for the best rate. Imagine a situation in which one bank offers a special rate of 2.5% APR for a 30-year mortgage, while their competitor offers 3.25% APR for a 30-year mortgage. The first bank, though, uses risk-based pricing.

Unless you qualify, you will not receive the premium 2.5% APR. Instead, your rate might climb to 3-3.5%, or higher.

To provide our borrowers with what we believe is the fairest pricing, we at Farmers and Mechanics assign the same rate to all borrowers who qualify, regardless of who they may be. This allows you, as the borrower, to know immediately what your rate will be. We want you to understand from the very beginning what the loan will cost and whether it makes sense for your particular needs.

As you consider lenders available to you in the market, we hope you will evaluate the fairness with which they treat you. Make sure you fully understand all the terms and how they plan to price your interest rate. If you have any questions, don’t hesitate to call us.