Mortgage Interest Rates & Your Credit
Mortgage interest is a huge cost for most homeowners. On average, it can take between 15 and 30 years to pay off a mortgage, if not longer. Over this period, homeowners will pay thousands of dollars in interest. In some cases, the amount paid in interest is close to the amount the home originally cost. Therefore, before taking on a mortgage loan, it makes sense to get your credit in the best shape possible to qualify for the lowest mortgage interest rates possible.
Your Credit and Mortgage Interest Rates
Most lender’s will use a variation on your FICO score to determine your mortgage interest rates and credit-worthiness. While the exact method of determining this store is a trade secret, the general formula is that:
- 35 percent of your FICO score is made up by your payment history, including late payments, bankruptcies and judgments.
- 30 percent is determined by your debt to credit ratio, or the amount you have borrowed as compared to the amount of credit you have available.
- 15 percent of your score is comprised of the average age of your credit history.
- 10 percent is based on inquiries, or the amount of new credit you apply for.
- The final 10 percent is based on how many different types of credit you have available to you.
Improving Your Credit
- In order to have the best credit score and get the best mortgage interest rates, you should take several steps.
- Make sure you have a mix of different credit. Borrow money when you buy your car, even if you plan to pay off the loan immediately upon taking it. Open one or more major credit cards several years before shopping for a mortgage home loan.
- Do not open new credit cards or take on new loans within two years of applying for a mortgage home loan. Opening new cards will show up as an inquiry and will lower your average age of credit, hurting your score on two fronts.
- Pay down debt aggressively. Not only will this look good for your payment history since you’ll be making payments on time, but it can also have a positive impact on your debt to credit ratio
- Avoid late payments within two years of buying a home. If you have one or more late payments on your report and are still a customer, consider calling your lender to ask if they will remove the late payment from your report as a courtesy
- Correct any mistakes on your credit report by disputing incorrect information with the credit bureaus.
By taking these steps and practicing responsible borrowing behavior, you can get your credit ready to qualify for great mortgage interest rates in no time.