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Improve Your Credit for Lower Mortgage Rates

 In California Real Estate, first-time home buyers, Home Mortgages, Mortgage Rates
improve your credit score for lower mortgage rates

Make sure your credit score is headed in the right direction!

You may have heard the good news about mortgage rates being at a three-year low. What many people don’t realize, however, is that most lenders require a credit score of at least 740 in order to qualify for those low rates. If your credit score is lower than that, you’ll end up with higher interest rates on your mortgage loan, which can make a big difference in your monthly payment, as well as the total amount of interest you pay over the life of the loan.

It’s worth taking the time to improve your credit score for lower mortgage rates, because settling for a higher-interest loan will cost you much more over time. Investopedia provides this startling example:

Let’s say you get a 30-year fixed rate mortgage for $200,000. If you have a high FICO credit score – for example, 760 – you might get an interest rate of 3.612%. At that rate, your monthly payment would be $910.64, and you’d end up paying $127,830 in interest over the 30 years.

Take the same loan, but now you have a lower credit score – say, 635. Your interest rate jumps to 5.201%, which might not sound like a big difference – until you crunch the numbers. Now, your monthly payment is $1,098.35 ($187.71 more each month), and your total interest for the loan is $195,406, or $67,576 more than the loan with the higher credit score.

Ouch. Clearly it’s better to go into your mortgage with a high credit score. But if yours needs some work, don’t despair. With patience, effort, and time, you can raise your score and put yourself in a position to get those lower rates. You can find several online resources providing steps and advice for improving your credit score, but it can be simplified somewhat, at least initially, by focusing on two things:

  • Pay all your bills on time. Set up payment reminders if needed, or schedule your payments online. Your payment history makes up 35% of your FICO score.
  • Reduce your overall debt. Stop using your credit cards, and begin to pay debts off as you can. Start with the credit card that has the highest interest rate, and attack that first, using money from expenses you can cut right away. For example, if you eat lunch out three times a week, scale that back to once a week, which should give you around $80 – $120 a month to use on debt. Or forgo your daily coffee stop and save the same amount. Once the first credit card is paid off, start working on the one with the next-highest interest rate.

Repairing your credit takes time and effort, but will pay off when you obtain a low-interest mortgage. Golden State Mortgage is happy to help with your questions on how to put yourself in the best position for the best home loan.

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