Home Buying Tips: Balance Credit Scores, Loan Terms, and Down Payments

By George Stargell, Senior Editor

Your credit score carries a lot of weight when you're in home-buying mode — but not the only weight. The size of your down payment and the length of your mortgage also play big parts. Finding the right balance among the three can mean the difference between a good deal and a bad one.

Home Loan Basics

Your credit score directly affects your mortgage's interest rate. If you have bad credit, home loans won't carry favorable interest rates, but they usually will if you have good credit.

Meanwhile, mortgage interest rates also vary by the life of the loan. (Check out the difference between 30-year and 15-year fixed-rate mortgages.) Smaller loans usually take less time to pay off. As a result, interest rates are typically lower on shorter-term loans.

At the same time, your down payment plays a big role in determining the size of your mortgage. A bigger down payment reduces the size — and possibly the length — of your mortgage.

Finding the Right Balance for Your Home Loan

The right balance varies from person to person, but here are three different scenarios:

• A high credit score and a large down payment offer the best of all worlds. Even with a lower credit score, though, a sizable down payment (20% or more) can reduce your mortgage size, length, and, in some cases, interest rate.
• A high credit score with a smaller down payment can still lead to more affordable interest rates, but you'll face a longer loan term, not to mention private mortgage insurance (PMI) costs. (PMI protects the lender if you default and is typically required until your mortgage falls below an 80-20 loan-to-value (i.e., home equity) ratio.)
• A down payment of less than 20% will add PMI costs without reducing your loan length. Your credit score will still help determine your interest rate, though.

Only you and a qualified financial advisor can determine the right size and length of your mortgage. Knowing your credit score and how large a down payment you can afford will help you make the right decision, though.