Buying a house is a huge milestone — and a big purchase. In order to make that purchase, you need a mortgage. However, a lender isn’t going to just hand over the money because you asked nicely. Instead, the lender wants to know that there is a high chance that you will repay the loan. After all, you aren’t actually fronting the money for your home purchase. The lender is on the hook for the money you spend on a home.
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One of the ways lenders gauge the level of risk you pose is by looking at your credit score. The higher your credit score, the less of a risk you appear to a lender. Your credit score acts as your financial reputation. When you have a higher score, it indicates that you have experience making on-time credit payments. Using that history as a guide, lenders are more likely to feel comfortable about lending you money for a mortgage.
Your credit score doesn’t just get your foot in the door with a lender, though. It can also determine how much you end up paying in the long run. You have to pay interest on any loan, and that includes your mortgage.
Higher Credit Score = Lower Mortgage Rate
A higher credit score indicates that you are more likely to pay on time. As a result, the lender feels more comfortable with you as a borrower and is willing to charge you a lower interest rate. A poor credit score usually means a much higher interest rate — and that means you pay more over the life of your loan.
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You can get an idea of how much you can save with a better credit score when you use the myFICO™ Loan Savings Calculator. As of September 16, 2016, the APR on a 30-year fixed rate loan you could expect to pay with a credit score in the “great” range of 700 to 759 is right around 3.335%. Compare that to the higher 3.512% rate for someone with a credit score of between 680 and 699, in the “good” range. It doesn’t seem like a lot, but when factor in the large loan amount over 30 years, the difference is substantial. Here is what the calculator points out if your principal is $250,000:
With great credit (700-759), you can expect a monthly payment of $1,100. Over the course of the term of the loan, you will pay $145,897 in interest. That’s pretty substantial.
With good credit (680-699), you can expect a monthly payment of $1,124. During the 30 years you have the loan, though, you will pay $154,743 in interest.
Just bumping up your credit score can save you $8,846. The differences are even starker when you move lower in terms of credit. It’s still possible to get a mortgage when you have a credit score of 620, but you will pay about 4.702%, bringing your monthly payment up to $1,297 and the interest you pay on the loan to $216,882. That’s a difference of $70,986 over the life of your loan.
If you have poor credit, it can make sense to wait until you can boost your credit score to at least 700 before you apply for a mortgage.
Your best results, though, come when you have a credit score in the “excellent” range, putting you at 760 or above. With an APR of 3.113%, your monthly payment will be $1,069 and you will pay $134,897 in interest. This is a savings of $10,946 over the life of your loan.
It’s important to note that average national mortgage rates may not be reflective of what you end up with in your local area. Compare rates online and locally to see what your best rate is for your credit score. If you can move into the next range, you could save thousands of dollars over the course of your loan.