Opposites Attract: How Credit Scores Affect Your Mortgage Rate

By Dawn Handschuh, Personal Finance Writer Archive

Today's depressed housing market represents a bonanza for house hunters, particularly for first-time buyers with no home to sell.

Homebuyers with higher credit scores will benefit from proportionately lower interest rates on their mortgages. That's because, like two magnets that repel each other when two like poles are joined, credit scores and interest rates enjoy an inverse relationship — the higher one climbs, the more the other falls.

How much can a higher credit score save you?

The spread between mortgage interest rates can be significant. For instance, based on national averages for a 30-year, $216,000 loan, the difference between the lowest and highest interest rates during the first week of August 2009 was 1.59%.

Therefore, in terms of monthly payments, a borrower with a score in the top tier would pay $1,140 on the same 30-year mortgage loan, compared to a $1,357 monthly payment by a borrower in the lowest tier. That's a $217 monthly difference! (Think of what you could do with an extra $2,604 annually for the next 30 years.) Put another way, why pay an additional $78,120 over the life of the loan if you don't have to?

National Average
$216,000 Loan/30-Year Fixed Mortgage

Credit Score           APR             Monthly Payment

760-850                 4.85%                     $1,140
700-759                 5.08%                     $1,169
680-699                 5.25%                     $1,193
660-679                 5.47%                     $1,222
640-659                 5.9%                       $1,281
620-639                 6.44%                     $1,357

Source: www.myfico.com 

Credit scores also affect:

• How much you pay for private mortgage insurance
• How much documentation you'll need to supply
• The size of your mortgage loan and down payment

Why do credit scores carry so much weight? Because lenders know that scores and delinquency risks run in sync with each other. For example, just two percent of consumers with a score between 750 and 799 ever reach 90 days past due on any credit account over a two-year period.¹ Delinquencies rise with lower scores.

Allow time for credit fixes

A low credit score is not the kiss of death, and you can level the playing field, so don't automatically resign yourself to becoming a slave to your mortgage. Get copies of your credit reports from all three reporting bureaus, plus your credit score, long before applying for a mortgage. It can take months to correct inaccurate entries and see those corrections reflected in your score.

Footnote

¹ www.myfico.com