How influential is your credit score on mortgage interest rates?
Your credit score, or FICO score, has one of the largest impacts on the interest rate you receive on a home mortgage loan. It's important to have good credit in order to receive the best possible mortgage rate on your home loan.
Statistics show that a person with a low credit score will likely pay three or more percentage points in mortgage
interest than someone with a high credit score. In other words, bad credit can cost you an extra $300 a month for a
$150,000/30 year fixed rate mortgage.
How are FICO scores calculated?
Your credit score or FICO score, which directly affects your home loan rate, is calculated using 5 different pieces of information; payment history, length of credit history, new credit lines opened, types of credit used, and amounts owed. Each pieces of information is weighted slightly different when compiling your over all credit, or FICO, score.
Payment history
If you've had late payments, bankruptcies, or other payment issues with creditors, your payment history score will reflect these problems by being lower.
Amount of debt
If you have a lot of debt, or maxing out your available credit, your debt score will be lower. Also, your debt-to-income ratio also affects this score.
Length of credit history
If you have a long history of credit, this will help with your credit scores. Longer history means better predictions. However, it's still better to have a short, but good credit history, than a long history of bad credit.
New credit accounts
If you have recently applied for, or opened any new credit accounts, it will be negatively reflected on your
credit or FICO score. Be aware that credit inquires, or credit checks for a new credit account will show up on
your credit score. If you are shopping for a home mortgage, do your rate shopping over a short duration to avoid
the inquiries negatively impacting you credit score. It's a good idea to hold off buying any new cars, boats,
motorcycles, or other expensive items until you've secured your mortgage loan. Otherwise you may end up paying more
in interest on your home loan, which in turn could cost you thousands of dollars.Types of credit
There are other various factors that can affect your mortgage interest rate. If a person with a long history of credit, also has/had a variety of credit lines, such as credit cards, auto loans, personal lines of credit, this can actually increase the credit score.