by Maurie Backman | Updated July 19, 2021 - First published on Oct. 20, 2020
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The more impressive your credit score, the more mortgage savings you stand to reap.
You've probably heard that you'll need a decent credit score to qualify for a home loan. That way, mortgage lenders will be more inclined to approve your application. But one thing you may not realize is that a higher credit score could also result in major savings on your monthly mortgage payments throughout the life of your loan.
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Generally speaking, you'll need a minimum FICO® Score of 620 to qualify for a mortgage. But that doesn't mean a 620 will snag you a great interest rate on that loan. Quite the contrary: To qualify for the best mortgage rates out there, you'll need a score in the mid-700s or higher. And that higher score could result in some serious savings.
Here's a snapshot of what your monthly principal and interest mortgage payments might look like based on your credit score:
|FICO® Score Range||Mortgage Interest Rate: 30-Year Fixed Loan||Monthly Payment for $100,000 Mortgage|
Now let's break down these numbers even further. If you apply for a mortgage with a 760 credit score as opposed to a 620, you might pay $87 less for your home per month. Over the course of 360 payments (30 years), that's a savings of $31,320.
All that money could help you pay for so many things over time -- home renovations, vacations, you name it. And that's why it really pays to boost your credit score before you apply for a home loan. You can snag one of the lowest rates and pay a lot less over time.
If you're eager to increase your credit score, perhaps the best way to do so is by paying your incoming bills on time. That will help your payment history, which is the single most important factor that goes into calculating your score.
Additionally, paying down debt could help bring your credit utilization ratio into more favorable territory. That's the second most important factor in calculating your score. Similarly, you can lower that ratio by getting a credit limit increase -- just don't go racking up more debt against it.
A few other moves to consider: Check your credit report for errors (and correct those that work against you), get added as an authorized user to a family member's card that's been open for a long time, and keep your oldest credit account open as long as possible. Finally, don't apply for too many new credit cards at once. All these steps should help improve your credit score over time.
The 4.030% rate you might get today even with a relatively low credit score actually isn't bad, historically speaking. But it still makes more sense to try to boost your score in the near term to snag a better deal. There's a good chance mortgage interest rates will stay low for quite some time. It could be worth holding off on a home loan application for a few months and taking steps to bring up your score in the interim.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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