How Credit Score Affects Your Mortgage Rate
Credit scores directly impact mortgage interest rates. Just 100 points could cost, or save, you a ton of money.
Unless you have a high credit score, you won’t qualify for the best mortgage rates available, which means you’ll end up paying more money over the life of your loan. The difference between 4% and 4.5%, for example, can add up, especially if you’re applying for a 30 Year Fixed mortgage. Your credit score is “one of the most important factors when trying to qualify, but it is a part,” says Michelle Chmelar, vice president of mortgage lending with Guaranteed Rate in New York. “You have to have the whole package: income, sufficient assets and credit.”
You’d probably hesitate to lend money to a friend who usually takes forever to pay you back — or doesn’t pay you back at all. Lenders feel the same way about mortgages. They want to lend to people who have a record of on-time payments to creditors.
How your credit score affects your mortgage rate
When you apply for a mortgage, your credit score is one of the top factors that impact your interest rate. Typically, the higher your score, the lower the interest rates you’ll be offered by lenders.
Before you look at houses, it’s smart to check your credit scores and pull your reports from the three major credit agencies. Tackling credit issues early on can help you raise your score before you apply for a mortgage.
Your PMI Premium You Will Also Be Affected by Your Credit Score
That relationship also extends to PMI. Like all insurance policies, you pay a premium for PMI. That premium is based on a factor that changes with your credit score. It makes a major difference in the amount you will pay for your premium.
Let’s say your home buying scenario looks like this:
- Primary home
- Single family residence
- Conventional fixed-rate loan
- 5% down payment
- 630 credit score
- $417,000 loan size
Due to your lower credit score, it’s not uncommon that you’d be expected to pay an interest rate that’s 0.375% higher than the average 30-year primary mortgage rate and higher than someone with a credit score above 800. If the 30-year primary mortgage rate is 3.875%, someone with good credit would pay 4.125% in interest (.25% above the primary rate) and you’d pay 4.5%.
Your monthly payment would be $2,112.88 compared with 2,029.99—that’s 82.99 more each month and $29,876.40 more over the 30-year life of the loan. Ouch!
Also, when you have less than a 20% down payment—so you’re financing 80% or more of the home price—your lender will require that pay a mortgage insurance premium. That private mortgage insurance (PMI) premium might be 110% of the loan amount on an annualized basis.
Here again, your creditworthiness factors into the PMI amount for a conventional loan—the lower your score, the more you’ll pay in mortgage insurance. For someone with a 630 credit score, that might be $4,587 a year or $382 a month. Another ouch!
For someone with a 700 credit score, the mortgage insurance premium would be approximately $3,127 a year or $260 a month—a $122 savings compared with your rate or $1,464 annually.
Good Credit Starts Right Now
Good credit doesn’t happen overnight, but you can begin to build and improve it today. The difference of a few points can cost you a lot in interest and fees over the course of the loan, so it’s to your advantage to get started early. I can help!