Credit score is the main factor that determines your mortgage interest payments. Your credit history, i.e. your previous loan repayment history, total outstanding debt as well as the types of credit used previously. The better your credit score, the lower your mortgage rate will be.
What is the optimal credit score required?
Credit scores generally range between 300 and 850. Generally, a credit score above 800 is considered excellent, which means you can qualify for mortgages at a lower rate than most. Scores between 740 and 799 are considered second level and are considered “very good”. However, any score below 579 is considered “poor” and borrowers are labeled subprime.
How much can you save with a better credit rating?
Since mortgages are generally long-term loans, with an average repayment term of 15 to 30 years, even a slightly lower interest rate translates into thousands in savings.
For example, you can get a 30-year fixed mortgage at an interest rate of 4.835% (as of August 1) if your credit score is “excellent”, meaning it is above 800. However, if your credit score falls below 640, the typical APR charged is 6.424%. You may have to pay nearly $100,000 extra in interest payments over 30 years if your credit score is between 620 and 639.
Mortgage rates today
Mortgage rates have fallen in recent weeks amid falling demand for housing and fears of a global economic slowdown. The average interest rate for a 30-year fixed mortgage was 5.79% as of September 6, 2022. The rate fluctuated between 5.4% and 5.8% last month.
This means that to qualify for a mortgage with interest below 6%, you must qualify as a “primary borrower” with a credit score above 800.