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How Credit Scores Affect Interest Rates and Mortgage Payments

Your credit score is one instance where literally “less is more,” in that the lower your credit score is, the higher the interest rate you will have pay.  Your credit score, low or high, determines your interest rate.   When you apply for a loan, the lender needs to understand who they are going to be lending money to so they can assess their potential risk in lending the money.  The higher the risk, the more the consumer pays to borrow that money.  In order to make that determination, they look at various factors, including employment, but the main factor is going to be your credit score.  The lender uses your credit score to estimate your ability to successfully satisfy your loan agreement.  If you have a high credit score, then you are likely to get a low interest rate.  If your credit score is low, then you can expect to pay a higher interest rate.  A higher interest rate also means that you will pay a higher monthly fees and ultimately a much greater cost for borrowing that money over the life of the loan.

A borrower with a credit score below 620 may find it very difficult to get approved for a home loan without a significant down payment.  Underwriters are hesitant about lending to borrowers with credit scores below 620.  You will need to prepare yourself for the reality that any money borrowed will undoubtedly be expensive in both interest rate as well as minimum monthly payment.    Currently interest rates are at an unprecedented low.  Even with these low rates, a borrower who is able to get his credit score above 720 can potentially save as much as $300 per month on mortgage payments, and over $100,000 over the life of the loan.   Should interest rates spike back up, these numbers will be significantly higher.

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