How Interest Rates For Mortgages Are Related to Credit Scores
Mortgage rates are rising thanks in large part to a variety of factors, including the Fed’s decisions.
If you want to avoid paying closing costs, consider applying for no-closing-cost loans, which can help you lower your costs and set yourself up for lower mortgage rates in the future.
They are lower for first-time homebuyers
Credit scores have a strong correlation with mortgage rates, but they aren’t the end all be all of the home-buying processes. Even though a higher credit score means lower mortgage rates, it doesn’t mean you should ignore low credit scores altogether. While the average credit score is around 600, you can qualify for an FHA loan with a credit score of 580.
That’s still considerably less than the 20% down payment required by most conventional mortgages.
While home prices have continued to rise, they have cooled off from their blistering pace at the end of 2021. According to Lawrence Yun, chief economist of the National Association of Realtors, home prices are not likely to drop, because demand has been outstripping supply and the quality of borrowers has remained high. The best strategy for first-time homebuyers is to look for a home with potential. It might be inexpensive, but it can help build equity in the home.
They are higher for those with low credit scores
Low credit scores are associated with higher mortgage interest rates. For every twenty points below a credit score of 780, interest rates increase by 0.2 percent. That means a mortgage with a score of 760 will cost you an extra $3,800 a year. Those with lower credit scores, however, will pay an average of only half a percent more per month. This difference is significant enough to discourage many borrowers.
The reason for this discrepancy is that lenders evaluate borrowers based on their FICO scores. A credit score ordered through a credit rating agency might not be based on a FICO score, but the interest rate you will pay will be higher. The mortgage interest rate you are offered will be determined by all of these factors.