How your Credit Score defines your Mortgage Rate
Most people are well aware that their credit score will have an impact on their mortgage rate. However most people also seriously underestimate the amount that their credit score impacts that rate. The truth is that even a small improvement in your credit can save you tens of thousands of dollars over the course of your mortgage. So it is well worth it to try and bump up your score before you apply for a mortgage.
When you first hear how your credit score defines your mortgage rate you really don’t think it is that bad. The difference between the mortgage that you will get if you have good credit will likely only be four or five percentage points lower than that rate paid by somebody with bad credit. When you first hear this you would think that the difference isn’t all that great in reality this isn’t the case. The difference in rates that sounds so small is actually a huge difference when you actually do the math.
To hear it a five point difference in mortgage rates doesn’t sound like that big of a deal. The problem is that your mortgage will likely last for thirty years. With the miracle of compounding that small difference in interest rate will add up to hundreds of thousands of dollars. In all likelihood a person with mediocre to poor credit will end up paying twice as much for their home when all is said and done than a person who has good credit. This is why it is so important that you make sure that you have the best possible credit score when you apply for a mortgage. Even a small savings can add up to tens of thousands of dollars.
Of course if you have a below average credit score you will likely find that the only mortgage that you can qualify for is a subprime mortgage. This is going to cost you a lot more than just a higher interest rate. A subprime mortgage will have a whole bunch of extra fees attached to it in addition to the higher interest rate. Even worse you will likely find that there are excessive early payment penalties making it impossible for you to refinance your mortgage. This would be a disaster if interest rates went down.
If your credit score is really bad you will likely find that you can’t qualify for a mortgage at all. However your credit would have to be really bad for this to be the case. The key to remember is that even small improvements in your credit can help you to get a better rate. There are things that you can do to improve your credit score fairly quickly. It is a good idea to learn about these and do them before you apply for a mortgage. If it can lower your interest rate by even a small amount it is well worth it.