Credit Scores and Mortgage Rates

When creditors are considering whether or not to provide you with a mortgage loan (and what interest rate to charge you), one of the first items they review is your credit score. Simply stated, the higher your credit score, the lower interest rate the lender will charge you.

What does this mean? Well, if you’ve decided you want to take out a mortgage or refinance, it’s a good idea to first check your credit scores (and your credit reports) from all three major credit bureaus. Knowing where you stand, as far as your credit goes, will help you get the credit you deserve. And, if your score is not as high as you’d like it to be, you can start working on raising it before starting your mortgage search.

What would YOUR interest rate be?

To find out what your mortgage interest rate would be, you can always use this myFICO calculator. However, we’ve made it even easier for you to see and understand the numbers by with the chart below (based on national rate averages for a 30-year fixed loan of $200,000). 

FICO scoreAPRMonthly paymentTotal interest paid
760–8504.17%$975$150,833
700–7594.392%$1,001$160,208
680–6994.569%$1,022$167,771
660–6794.783%$1,047$177,020
640–6595.213%$1,100$195,938
620–6395.759%$1,168$220,584

Although the difference in monthly payments is “only” $193 (please note, that the word “only” is in quotes) between the highest and lowest credit score, the total interest paid differs by $69,751! That’s a lot of extra interest to pay because of a low credit score. We’ll also mention that the extra $193 per month comes out to an additional $69,480 in monthly payment. In essence, if you’re at the lowest end of the credit score spectrum, at the end of 30 years, you’d have paid a total of $139,231 more than if you received your loan while at the higher end of the credit score spectrum.

Is saving $140,000 worth taking the time and effort to raise your credit score now? Something to think about, right?

How and when credit scores start affecting your loan

Credit scores at 720 or above are considered “excellent” and will help you obtain the lowest interest rate and best terms on a mortgage. Typically, the lower your score moves down the scale, the higher your interest rate becomes – especially when you start entering the mid-to-low 600’s.

Take a look at this quick video for an easy-to-understand example of how your score can affect your ability to get a loan and determine the rate of that loan.

Many lenders use a process called, “loan-level pricing”. It basically works like this: the credit score scale is sliced up into 20-point increments. A borrower’s rate adjusts with each 20 point move up or down the scale. So, every time a borrower’s score doesn’t go down a “level”, there’s an increase in cost… and vice-versa.

Loans available for borrowers with lower credit scores

For borrowers who have a credit score more toward the lower end of the spectrum, there are loans that might be available to them. Most of them have specific terms and requirements (doing research is crucial for these loans), and they include:

  • FHA Loan (link to FHA blog) guaranteed by the Federal Housing Administration for borrowers with “less than ideal” credit
  • VA Loan are offered to active and veteran military personnel and their families.
  • USDA Loan for low-to-moderate income borrowers purchasing in a rural area.

Tips to help raise your credit score

If you’d rather wait until your credit score is higher so you can get better loan rates and terms, here are some tips to help with that…

  • Pay every single bill on time
  • Pay down credit card balances
  • Keep your credit utilization below 30 percent
  • Dispute and fix and errors on your credit report(s)
  • Don’t close older credit lines after they’ve been paid off
  • Don’t open any new lines of credit or take out large loans

See how other myFICO customers manage their credit score while trying to find a mortgage. Visit the myFICO forum and see their experiences… and don’t forget to share your own!  

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Rob is a writer… of blogs, books and business. His financial investment experience combined with a long background in marketing credit protection services provides a source of information that helps fill the gaps on one’s journey toward financial well-being. His goal is simple: The more people he can help, the better.

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