Mortgage Rates By Credit Score

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Your credit score is one of the most important factors when you're applying for a mortgage. Your credit score will influence your monthly mortgage payment, the total amount of interest you pay on your mortgage loan, and ultimately the total amount you pay for your home. Because your interest rate is based on your credit score, you should make sure your credit is in the best shape possible before applying for a mortgage.

How Your Mortgage Rate is Set

Interest rates are set partly based on your riskiness as a borrower. The riskier of a borrower you are, the higher your interest rates will be. Mortgage lenders use credit scores, not only to determine whether you qualify for the mortgage in the first place, but also to determine risk and the likelihood that you will default on your mortgage loan. The higher your credit score the lower the risk that you’ll default on your loan and the lower the interest rate you’ll qualify for.

A high credit score demonstrates that you’ve been responsible with your previous credit obligations. You’ve made your payments on time, you’ve kept your balances low, and you’ve avoided major credit blunders like debt collections and charge-offs.

A low credit score, on the other hand, is the result of falling behind on credit card payments, keeping high balances, and perhaps having major delinquencies on your credit record.

How Credit Scores Affect Mortgage Rates

FICO, creator of the FICO score, has an excellent that demonstrates the impact of credit scores on mortgage rates. You can visit the loan savings calculator enter your state, mortgage amount, and credit score rage and get an idea of what your mortgage terms would be. The calculator is only an estimate––your mortgage lender can give you exact terms after reviewing your complete financial details and down payment.

Assume a $200,000 30-year fixed rate loan. (A fixed rate loan is one in which the interest rate is set for the life of the loan and doesn’t change). Here are examples of credit score ranges, the mortgage rates, and impact on the mortgage cost.

  • 760 to 850: APR of 4.186 percent with a monthly payment of $976. The total interest paid on the mortgage would be $151,504.
  • 700 to 759: APR of 4.408 percent with a monthly payment of $1,002. The total interest paid on the mortgage would be $160,888.
  • 680 to 699: APR of 4.585 percent with a monthly payment of $1,023. The total interest paid on the mortgage would be $168,459.
  • 660 to 679: APR of 4.799 percent with a monthly payment of $1,049. The total interest paid on the mortgage would be $177,716.
  • 640 to 659: APR of 5.229 percent with a monthly payment of $1,101. The total interest paid on the mortgage would be $196,051.
  • 620 to 639: APR of 5.775 percent with a monthly payment of $1,170. The total interest paid on the mortgage would be $221,317.

As you can tell, the interest rate, monthly payment, and total interest paid all increase as credit scores go down. The difference between getting a mortgage with a 620 credit score and a 760 credit score means $194 on your monthly mortgage payment and $69,813 on the total interest paid on the mortgage.

Checking Your Credit Score

You should check your credit score well before you begin the mortgage process so you know where you stand and the mortgage rate you could qualify for. You can check your credit score fore free at CreditKarma.com, CreditSesame.com or WalletHub.com. Since most major mortgage lenders use credit score in their decision, it's worth it to purchase all three of your credit bureau FICO scores from myFICO.com.

Qualifying for a Lower Mortgage Rate

It may be helpful to improve your credit score before applying for a mortgage so you can qualify for a lower mortgage rate and save tens of thousands of dollars over the life of the mortgage. The money you save on your mortgage is well worth the time and effort to improve your credit score.

If you have a low credit score, pull copies of your credit reports to see the items that are affecting your credit score. You can raise your credit score by making timely payments on all your bills, paying down your credit card debt, removing errors from your credit report, and paying off outstanding delinquent balances. In some cases, just a few points can make a big difference in your mortgage rate.

Continue to monitor your credit score in the weeks leading up to your mortgage application to see how your credit score improves.