How Much Would Your Credit Score Actually Affect Your Monthly Mortgage Payment?

When you want to buy a house, mortgage lenders take a look at your credit score. Your score is supposed to be an indicator of how reliable of a borrower you are, as it shows both what kinds of debt you've taken on and how responsible you have been with paying it back.

But, just how much does your credit score actually impact your rate and your monthly payments when you buy a home? Here's what you need to know.

Your credit score can make a bigger impact than you might think

The reality is your credit score has a profound effect on how much your home ends up costing you.

For example, according to myFico, the national average mortgage rate for people with a FICO® Score of 760 to 850 is 6.455%. This is considered an excellent score. For those with a decent but not great score (between 660 and 679), on the other hand, the national average interest rate is 7.068%. And for individuals with a score of 620 to 639, the national average rate as of June 16, 2023 is 8.044%.

So, there's a big difference in the rate you may be offered if you have good versus decent or poor credit. But, what does this do to your monthly payment exactly? Well, for each $100,000 you borrow, here's the monthly payment you'd be looking at for a 30-year fixed-rate mortgage at the national average rate with different credit scores:

As you can see, your payment jumps up more than $100 a month if you go from fair or poor credit to great credit. That's a whole lot of extra money you're going to get stuck paying every single year for 30 years just because your credit score wasn't as good at the time you borrowed.

How to improve your credit to get a better home loan rate

Since credit score does impact your mortgage costs in a major way, it's worth trying to improve your credit score to qualify for the best home loan rates.

You can do that by practicing very responsible borrowing behavior in the months and years leading up to the time you get your home loan. For instance, you will want to make sure you always pay your credit cards and other debts on time every month. That's because your payment history is the most important factor when your score is calculated.

It's also important not to open too many new cards in the time leading up to applying for a mortgage, and to make sure you are not using more than 30% of the credit available to you. Keeping your credit balance low is important because your credit utilization ratio (credit used relative to credit available) is the second most important criteria considered in the credit scoring formula.

If you can work to pay down your debt and always make payments on time, this will go a long way towards helping you to get a great credit score and a low-priced mortgage. Since the monthly payments differ so much for great scores versus poor or fair credit, it's worth trying to improve your score as much as you can before moving forward with getting a home loan.