How does your credit score affect your mortgage interest rate?
Getting a mortgage is a very stressful event in a persons life. It is usually by far the largest loan a person will get in their life, and getting a mortgage you can afford, with interest rates that will not cut you down, can be very difficult depending on your credit rating. The question most people will ask themselves is How is my credit score affecting my potential interest rate?
While many people ask themselves this question, most do not truly understand how their credit score affects their mortgage interest rate. All it takes is a small percentage increase on your interest rate and you pay thousands more. For example if you have a mortgage worth $350,000 and you pay seven percent in interest, you will pay an total interest payment of $24,500. However, if that interest rate is only three percent more at ten percent, then the interest payment you make in total is $35,000. That is an increase of $10,500 on what you pay throughout the life of that mortgage. All it took was a three percent increase on your interest rate.
So, how does your credit score affect your interest rate?
If you have excellent credit of 760 to 850 on your FICO score, you will pay about 5.780 percent in interest based on 2007 interest rates. If your score is 700 to 759, you will pay 6.002 percent, and from 660 to 699 you will pay 6.286 percent. If you have the average FICO score, which is 620 to 659, you will pay 7.096 percent.
Naturally, as you fall lower on the credit score scale, the amount you pay in interest will increase. If you are at 580 to 619, which is a fair credit score, you will pay 8.583 percent, while 500 to 579 will cause you to pay 9.494 percent. It would be pointless to look at a credit score below 500 because there is virtually no way to get a mortgage with a credit score that is that low.
This shows the importance of making sure your credit score is very good, rather than fair by using credit repair services. If your credit score is 760, then on that mortgage above you will pay $20,230. However, if you are only 260 points lower at 500, then you will pay $33,229. That is a difference of just under $13,000 and all it takes is a few missed payments on your credit card, a collection notice and having too many credit cards.
Your mortgage rate is tied directly with your credit score. The lower your score is, the higher the interest rate will be. As a result, you want to make sure that you have very good credit before you try and get a mortgage. Even getting your credit report sent to you can help because it will give you an idea of what interest payments you will be making. Nothing would be worse than being surprised by the interest rate, and then struggling to pay it down the road. No one wants foreclosure, so be smart before you get your mortgage in order to avoid complications later.