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How Does Your Credit Score Affect Your Mortgage Rates?

Christy Bieber, The Motley Fool


Your credit score can affect how much you have to pay for a mortgage. Find out more here about how your score impacts your rates.

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Your credit score affects many different financial transactions you enter into, from applying for a job to getting a cell phone contract or getting utilities connected. However, one of the single most important things your credit score is used for is to determine both if you'll be approved for a mortgage loan and how much interest you'll pay.

Getting a mortgage loan is important to many Americans because owning a home is the American dream. Homeownership is also a powerful wealth-building tool, as homeowners generally have significantly higher net-worths than renters. But, because a mortgage is such a large debt, even a small difference in the interest rate could make a huge difference in how much you pay over time. 

While there are many factors that go into determining your interest rate, including your loan term and the current market rates where you live, one of the most important factors is your credit score. In fact, as you'll see below, an increase or decrease in your credit score could change your monthly payment -- and the total interest you pay on a mortgage -- very substantially. 

How does your credit score affect your mortgage rate?

To better understand how your credit score affects your mortgage rates, consider the table below. The table shows what you'd pay with various credit scores for a $300,000 mortgage loan on a 30-year fixed rate mortgage, based on the national average interest rates current as of October 2018.

FICO® Score range

Mortgage APR

Monthly payment

Total interest paid

Extra interest paid compared with excellent credit

760-850

4.487%

$1,771

$287,451

$0

700-759

4.709%

$1,817

$304,165

$16,714

680-699

4.886%

$1,855

$317,644

$30,193

660-679

5.1%

$1,900

$334,117

$46,666

640-659

5.53%

$1,994

$367,788

$80,337

620-639

6.076%

$2,116

$411,601

$124,150

Data source: MyFico.

As you can see, you could end up paying almost $125,000 more in interest when your credit score is very low compared to having a perfect score. And, even dropping down just one score range could cost you more than $15,000 in extra interest over the life of your loan.

Make sure to improve your credit score before applying for a mortgage

Because your credit score has such a profound impact on your mortgage costs, it's imperative you do everything possible to try to improve your credit before you apply for a mortgage. Some of the steps you should take include:

  • Paying down debt: By reducing your debt-to-credit ratio, you improve your credit utilization rate and increase your credit score. This will also help you to improve your debt-to-income ratio, which is another important metric that mortgage lenders consider. Your debt-to-income ratio evaluates how much of your income you're using towards debt payment.
  • Correcting mistakes: You'll want to ensure you don't get penalized and pay a higher mortgage rate due to errors on your credit report. It can take time to get a mistake corrected, so check your credit several times in the months leading up to applying for your mortgage and take action if you notice incorrect info.
  • Improving your payment history: Pay your bills on time all the time to develop a positive payment history, as this is the most important factor in your credit score. If you have one late payment on your report, consider reaching out to the lender and asking for a goodwill adjustment where they remove that record of the late payment. If you've mostly been a good customer, many creditors will do that for you.
  • Avoid taking out new loans: If you borrow money or open a new credit card, this will lower your average credit age and hurt your score. Even applying can affect your credit score, as an inquiry is placed on your report every time you apply for new credit and stays there for two years. Too many inquiries makes lenders nervous you're getting in over your head with debt, thus lowering your score.

It can pay to take a few more months to try to boost your credit score before applying for a mortgage loan, as doing so could save you thousands of dollars in interest over the life of the loan.

It's important to have good credit when applying for a mortgage

Clearly, it's important to have good credit when you apply for a mortgage. By following best practices for earning and maintaining a good credit score, you can get the most favorable terms possible for your mortgage -- and the biggest debt you're likely to incur should be more affordable to pay back due to your efforts.

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