If you have a mortgage payment or plan to apply for one, your credit score is a significant factor in your mortgage payments. When you take out a mortgage, your credit score is one of the main factors lenders use to decide the amount they’ll lend you. Your credit score can also influence what type of mortgage options are available to you and the interest rate on your loan. With a high credit score of 700 or above, it will be easier for you to qualify for mortgages with low-interest rates.
With a credit score below the average, say 580-670, there may be other ways to get financing besides taking out a home equity line of credit or getting an unsecured personal loan. Do you have a mortgage payment or plan to have one in the future? If so, how strong your credit score is will impact what you pay. Having a good credit score can save homeowners hundreds of dollars per month on their mortgage payments.Â
Determining mortgage rates
Based on your credit score, you may apply for a better interest rate than others who have the same type of loan. For example, if you take out an adjustable-rate mortgage (ARM) with an initial interest rate of 5% and your credit score is 620, your initial interest rate would likely be 8%. If you have a credit score of 740 or higher, then based on current laws for lending practices in the U.S., you might qualify for an ARM with an initial fixed interest rate of 4%.
A mortgage interest rate is one thing that lenders use to determine the starting point for your monthly payment. Another factor is how much money you’re borrowing. Each lender has its way of arriving at this overall rate. At the same time, the general formula for figuring out your mortgage interest rate is complicated. More important is how this affects your monthly payments and the general terms of your loan.
If you plan on getting a mortgage, it is essential to know that your credit plays a critical role in determining your interest rate. If someone has good credit, they are more likely to repay their loans on time, and banks can lend them more money. Banks may even be willing to offer a lower interest rate on a loan since their risk is reduced. Lenders will look at various factors when determining the terms they are ready to provide for borrowers with multiple levels of credit scores.Â
Credit and your Mortgage Interest Rates
There is a strong correlation between your credit score and the interest rate on your mortgage. If you have bad credit, the bank or lending institution will assume that you are more likely to default on your payments and require you to pay higher interest rates to compensate. The most used retail credit score is a FICO score which ranges from 300-850, with 850 being excellent credit and 300 being terrible credit.Â
Someone approved for a 30-year fixed-rate loan at a 3.8% interest rate might pay $100,000 less over the life of their loan compared to someone approved for a 30-year fixed-rate loan at a 4.5% interest rate. If you had lower credit scores, your mortgage interest rates could be higher than 6% or more. Some institutions rely on FICO scores; others do not rely on these scores alone when offering mortgages for their clients. Instead, they might look at other factors, such as your income and assets.
Building a Good Credit Score
To have increased chances of being approved for a mortgage, building a good credit score is essential. A good credit score will be between 650 and 700. Anything above 500 is considered ok; below this number means you need to build your credit more. You can achieve a good credit score by following these steps.
1 – Pay bills on time
The first step in learning how to build a good credit score is paying all of your bills on time. If you pay any utility bill late, the company is entitled to charge you as much as $39 per incident as well as additional fees that vary by state and region. This will lower your overall credit rating and make it more challenging to get approved for a mortgage loan.
2 – Maintain low credit card debt
Another way you can build good credit is by making sure that your overall credit card debt remains consistently low. Ideally, once your balance on each of your cards reaches $500 or less, continue to pay it off in full every month. Any money you owe on the card will be reflected in how lenders view your ability to repay any debts that might result from taking out a home loan.
3 – Don’t apply for new credit often
A very effective way of building up a good credit score is not applying for too many different credit cards or loans. Most Americans have several credit accounts, and lenders like to see stability and consistency in your behavior. By not applying for many new credit products throughout the year, you’ll be able to maintain a good score even as you go about your life and make regular purchases on existing lines of credit.
Your credit score impacts your mortgage payments. A good credit score will save you money by giving you a lower interest rate on your mortgage, but it takes time to build up that high of a score. Start building now by using the tips in this blog for establishing and maintaining an excellent credit rating over the long term. So you’ll have access to low rates when it comes time for home buying or refinancing. If you want additional information about staying on track with your finances or if you need Movoto’s help for any of your real estate needs, feel free to contact them today.
