The Effect of Credit Scores On Mortgage Interest Rates

Updated June 15, 2013

Did you know that once your credit score exceeds a certain threshold, it doesn't matter how much higher it goes? You'll still get the same mortgage rate whether your score is 760 or the highest possible score, 850. Check out this calculator from myFICO, which will show you what interest rate you can get given your credit score.

This chart shows that in the 700-759 range, you'll pay 0.22% more than borrowers with the best credit scores (those in the 760-850 range). Those in the lowest credit score bracket of 620-639 will pay 1.59% more than borrowers with the best credit scores. That's fairly significant both in terms of monthly payment and the amount of interest you'll pay over the life of the loan.

In other words, if you can do a few things to quickly improve your credit before applying for a mortgage, do them. If you are carrying credit card balances and can afford to pay them off or pay them down entirely, for example, do it. Just don't close the account when you're done (if you can avoid it) because that will lower the average age of your accounts, which will hurt your score. I say if you can avoid it because some cards charge an annual fee, and I would want to ditch that card even if it hurt my score--but that's just me. Bumping your credit score up a bracket could lower your interest rate by at least 0.2%.

I know there are things I could do to improve my credit score, but since my score is already above 700, I think the best plan for me is to do nothing. My fear is that with some of the ambiguity in credit scoring, I might do something I think is helping my score and end up hurting it instead. I figure if I keep doing what I'm doing, my score should stay the same and keep me in good standing.

Photo by alisdair

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First-Time Homebuyer Guide
Navigating Real Estate Listing Lingo
Why You Should Use A Buyer's Agent
Understanding Closing Costs

2 comments:

Melanie said...

You mentioned that one should pay off or pay down any credit cards to give the credit score a boost before applying for a mortgage. I'd also like to suggest that (IMHO) if you're carrying a balance on any credit card that you can't immediately pay off and you don't have at least 3-6 months living expenses set aside as an emergency fund, you should reconsider whether you're ready to buy a house.

Amy said...

Good point, Mel. I agree completely. From a lender's standpoint, however, I believe you could get the loan with only 3 months' worth of PITI in the bank (not even 3 months' of living expenses--presumably you would choose to starve before you missed a mortgage payment, I suppose) and with the credit card debt as long as your monthly income was high enough to afford both the PITI and the minimum required credit card payment. That doesn't seem like a very smart lending practice to me, though, and it is probably one of the reasons people aren't more encouraged to get rid of their credit card debt.