When you are going to apply for a home loan, you might have noticed everyone asking you about credit scores. Well, did you know the FICO score affects interest rates as well? Yes, the amount of interest you are going to pay over the life of the loan highly depends on the credit scores.
But, how or why does the credit score affect the loan rate? Is there a relationship between credit score and a low mortgage rate? If you are on your way to finding the best mortgage rates Houston, you should read the rest of the article.
Understanding How Mortgage Rate is Fixed
How risky are you as a borrower? In fact, this is a factor before setting the mortgage rate. The more risks you are associated with, the higher your interest rate will go up. Now, credit scores enter the scene because it determines if a borrower qualifies for a mortgage or not. If the score is crumbling to the ground, you are at high risk. Needless to say, a higher credit score lowers the risk factor and you can qualify quickly. Therefore, the credit score acts as a demonstration of your financial responsibility. Low credit score refers to outstanding debts and delinquencies on the credit card.
Credit Score can Save a Large Amount
If your FICO score stands between 760 and 850, focus on a 30-year fixed mortgage available with 4.14% interest rate. So, your mortgage rate can be lower than a borrower with 660 or 679 scores. Of course, the interest rate does not only affect the monthly payment but it also lowers the principal you will pay off in the initial period. To break it down for you – in 10 years, if a person’s FICO score is between 760 and 850, he will have to cover $141,094 in the full payments. If we take the same period, the person with 600 or 679 will have to cover $151,631. Moreover, high credit scores build equity in the property at a significantly low cost.
Strong Credit Score for the Best Mortgage Rates
If you are not confident on the credit front, work on it. Checking reports, making payments on time, and reducing debt utilization – these are the simple ways to get started. If you are thinking of 20% down payment on the new home purchase, you must have at least 760 to get low rates and private mortgage insurance. Even after working hard, if your credit score stands at 740, you can still get the best loan terms and mortgage rates.
Home Loan Options for Low Credit Scores
A borrower with a low credit score is a risky investment for the lender. However, it does not indicate that there are no options for you. For example, FHA is one of the popular mortgages designed for borrowers with less than stellar credit scores. The government insures the loans so the lenders are partially on a safe side when a borrower defaults.
In the end, you should keep monitoring the credit scores every week until the mortgage application is over. If you can improve the score, you are on your way to unlocking the best mortgage rates in Houston.
Author Bio: Joan Gallardo, a Senior Loan Officer, with 20+ years of experience, here writes on 2 questions to ask the best mortgage lender in Houston when you are about to choose one of the first time home buyer programs in Houston.
