How a Better Credit Score Affects Your Mortgage Payments

Summary: How does a better credit score affect you when applying for a mortgage loan, and how much money can it save you each month? Let's take a look.

I'd like to take a break from answering credit questions in order to share some interesting math with you. I know what you're thinking: "There's no such thing as interesting math." But stick with me. The following numbers will show you how a better credit score could affect your mortgage rate and save you money. Ah, now I have your attention!

You probably already know that earning a better credit score will help you get a lower interest rate on a mortgage loan. That score isn't the only thing lenders will review -- they'll also look at your income, your overall debt and other things. But your credit picture is one of the top factors that determine whether or not you get approved for a loan. So the better your score, the better your chances of getting a mortgage.

In the current economy, you'll probably need a score of 750 or higher to get the best rates a lender has to offer. But how does this translate into monthly savings? Let's do some basic math to find out. Here's a realistic scenario that shows how much a better credit score can save you each month.

A Better Credit Score Scenario for Saving Money

Let's say I'm looking for a home loan in the amount of $250,000, after my 20% down payment. So I find a lender and apply for a loan. I find out that my credit score is 650, which is at the bottom of the lender's qualification scale. I'm able to get approved with a score in this range, which is good. But I won't the get lender's best interest rates at this level. I would need a better score to do that. So here's how the numbers work out.

Mortgage Scenario #1

• I opt for a 30-year fixed mortgage.
• The loan amount is $250,000.
• My FICO credit score is 650.
• The lender approves me for an interest rate of 6.9%.
• My mortgage payment comes out to around $1,646 per month.

Now let's assume I went through this same process with a better credit score, and all other factors being the same. How does this affect my monthly payment? How much money do I save? A mortgage calculator reveals the following numbers:

Mortgage Scenario #2

• Once again, I choose a 30-year fixed mortgage.
• The loan amount is the same -- $250,000.
• This time, I have a better credit score-- 780.
• The lender approves me for their best rate, which is 5.4%.
• My mortgage payment comes out to around $1,400 per month.

In this scenario, I could save around $246 per month. I don't know about you, but I sure would like to have another $246 in my pocket each month. And with a better credit score, that's exactly what would happen. What does that amount mean to you? A car payment? A few trips to the grocery store? More money to put toward savings, or perhaps a few more dinners out each month? However you spend it, we can agree that it's better off in your pocket than the lender's pocket!

This is a very realistic scenario, by the way. I didn't pull these numbers out of thin air. I used Freddie Mac's weekly mortgage survey for interest rate figures, and I used an accurate mortgage calculator provided by Bankrate.com. And the numbers don't lie. You can save a lot of money by improving your credit situation before buying a home.

If you find out that your score is low, and you want to know how to improve it, you'll find plenty of advice on this blog. Here is some recommended reading on the subject. You can also find a lot of good advice on the MyFICO.com website.

I hope this helps you understand the value of a better credit score, and how it relates to your monthly mortgage payment. Good luck.