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How your credit score affects your mortgage rate

Updated on October 25, 2014

When Credit Scores Go Down, Interest Rates Go Up

Since your credit score is the Holy Grail of creditworthiness, it has a huge impact on the interest rate you will get for your home loan. What is important to realize is that your Interest rate moves inversely to your credit score. That means the lower your credit score the higher your interest rate. To get our analysis started to see how much of an affect credit scores have, I compiled a list of average mortgage interest rates for yesterday, October 23, 2014. These figures assume a 30 year fixed mortgage for a $150,000 principal balance.

Interest rates on 10/23/2014 for a 30 Year Fixed Mortgage

Score Minimum
Interest Rate
760
3.586 %
700
3.809 %
680
3.987 %
660
4.202 %
640
4.635 %
620
5.184 %

I took the above data and I charted it using Microsoft Excel. From the char you can clearly see from the chart that the relationship between credit score and interest rate is linear. There are no magic credit scores where interest rates dramatically improve.

Interest rates as of 10/23/2014 and correlating credit score
Interest rates as of 10/23/2014 and correlating credit score

Let's make the data more meaningful

Now that I have shown you that your credit score determines your interest and the interest rate is fairly linear. This means a higher credit score causes a lower your interest rate. What I haven't shown you is what the impact is over the life of loan between the different credit scores.

Let's extend the data that we have already looked at and calculate what the mortgage payment will be monthly. Finally, we will also show cumulative savings as the credit score improves.

Credit Score and Your Monthly Payment

Minimum Score
APR
Monthly Payment
Payment Difference
760
3.586 %
$681
--
700
3.809 %
$700
+$19
680
3.987 %
$715
+$34
660
4.202 %
$734
+$53
640
4.635 %
$772
+$91
620
5.184 %
$822
+$141

Now you can really start to see the affect of your credit score. For example, for the best score you would pay $681 per month for your mortgage. But if your credit score was on 700, you would pay an additional $19 per month. That is an additional $228 per year! Then take a look at the most drastic scenario. If your credit rating is 620, you would pay an additional $141 per month! that is an additional $1,692 every year! As you can see, small changes in interest cause large savings (or expense) over the life of the loan.

Another aspect of the affect of credit scores is the total interest paid over a thirty year loan. The following chart lists the same data except it shows total interest paid and the differences between each credit score.

Credit Score and Your Total Interest Paid. Look Out!

Minimum Score
APR
Total Interest Paid
Difference
760
3.586 %
$95,084
--
700
3.809 %
$101,894
+ $6,810
680
3.987 %
$107,400
+ $12,316
660
4.202 %
$114,132
+ $19,048
640
4.635 %
$127,959
+ $32,875
620
5.184 %
$145,986
+ $50,902

I hope you can see the dramatic differences in the total amount you would have to pay out for bad credit score. If your credit score is 620, you would pay an additional $50,902 than someone with a credit score of 760! That is a little more than 1/3 of the price of the house.

Your credit score will be 760 very soon
Your credit score will be 760 very soon

What does all this mean?

It can be very deceiving when you consider the difference between the best and worst interest rates is only 1.598%. Without this analysis you may not have thought much about the interest rate difference. Hopefully now you understand how dramatically different 1.5% in interest is over the life of a mortgage.

It's clear the higher the credit score, the more you will save. So before you talk to a mortgage lender you need to make sure that your credit report is in order. You need to obtain a copy of your credit report and make sure of the following:

  1. There are no errors on your credit report that are driving down your credit score
  2. Resolve any negative items on your credit report such as late payments, debt collections, tax liens. All of these negatively impact your credit score.

If you find you have issues on your credit report, it's well worth the time to clean up those issues. It may take a few months to resolve the issues but getting your credit score as high as possible is in your best interest before you apply for a mortgage.

If you are not sure how to go about fixing your credit report, you can hire a company to help you fix them for you. They will charge you a fee and the fee depends on how much needs to be fixed. It is in your best interest however, to spend a few minutes Googling "how to fix my credit report" to see if you want to do it yourself.

One final piece of advice. After you have fixed your credit report and you are ready to talk to lenders, when a lender asks you "How is your credit?", you always say it's excellent! There are some unscrupulous loan officers that are looking to see if you "think" you have bad credit. This is because if you "think" you have bad credit they will charge you a higher interest rate, even if you have perfect credit! Consider yourself forewarned.

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