While your credit score might not determine your value as a contributing member of society, it does have a major impact on your life and how you are able to live it. If you’re contemplating making the leap into homeownership, for instance, your credit score will have a great deal to do with the interest rate you’re given on the home loan. In turn, that will affect the overall cost of your home loan. How does your credit score affect your mortgage rate, though?
Your credit score is a numerical summation of the amount of risk you pose to a lender. The higher the number, the lower your risk level. The lower the number, the riskier you are. If you’re in the mid to low span of the credit score range, you’ll find that lenders really don’t want to take a chance on you.
If you’re in the upper-mid to high credit range, lenders are happier to see you walk through their doors. However, you’ll find that it’s not just about whether or not you can get a loan in the first place, but about how much you’re going to pay for the privilege of taking out that loan.
Mortgage rate is another term for interest rate. It’s what you’re going to be charged for taking out the loan. You never repay just the amount the home costs – you always pay the lender for allowing you to borrow money. That’s the lender’s profit, and the greater the risk you pose, the more profit the lender wants to make to offset the chance that you’ll default before the loan is paid off and they’re left holding the bag.
Generally, the closer to 750, 800 or 850 (the max FICO score) you have, the better the mortgage rate you will be offered. However, understand that the individual lender is responsible for determining what score a borrower must have in order to be offered the best interest rate on their mortgage. Still, realize that a change of just a few points can make a significant difference in what you pay per month, and what you pay over the life of the loan. The difference between a mortgage rate of 5% and one at 8% is hundreds of dollars per month, and your credit score is the key to that rate.
A higher credit score is always better. Well, at least until you get to a certain point. Up to about 700, your mortgage rate will decrease as the numbers increase. Even a modest jump of just 25 points can move you from a higher mortgage rate to a much lower one. However, once you pass the 700-point mark, you need to start considering other things to change your mortgage rate. These can include things like the type of loan you obtain, or your annual income amount.
While your credit score will dictate what mortgage rates you’re offered, there’s good news for those with less than stellar financial histories. You can improve your score. It will take time and effort, though. Start by disputing any items on your credit history that aren’t yours, and then work on paying off outstanding debt and high credit card limits. With time and perseverance, you can boost your score.
However, remember that there’s little point in shooting for the highest score possible. Generally, a score of 700 – 750 is considered excellent, and even those with scores slightly under 700 can receive good mortgage rates.