Your credit score plays a big role in how low of a rate you can get on a home loan. Generally, the higher your credit score, the lower your mortgage rate. And the lower your mortgage rate, the lower your monthly payment.
Here’s an example: A person with a credit score of at least 760 who qualifies for a loan with an annual percentage rate (APR) of 3.64% would have for a monthly payment (principal and interest) of about $1,371 per month on a $300,000 loan. The same borrower, but with a credit score between 700-759, may qualify for a higher annual percentage rate of 3.86%, which pushes the monthly payment up to about $1,409. Someone with a not-so-good credit score of 620 to 639 — if they qualify for a home loan at all —would be looking at a significantly higher rate of 5.23% and have a monthly payment of $1,653, according to credit-scoring company Fair Isaac.
Aside from a lower mortgage rate and a lower monthly payment, a good credit score can help you pay less interest over the life of your loan. In the example above, the borrower who qualified for a rate of 3.64% would pay a total of $192,961 in interest over the life of the loan, compared with $294,442 in interest for the borrower with the lowest credit score and highest mortgage rate.
Questions about your credit score and qualifying for a mortgage? We’re here to help you learn more about the mortgage lending process.