How Does Credit Affect My Mortgage Rate?

Good Credit Equals Lower Mortgage Loan Rates.

Over the years, I am often asked whether or not credit impacts the interest rate one can obtain from a mortgage lender. I always give a resounding yes. In fact, good credit not only means that you "should" get lower rates on most types (mortgage, car, personal) of loans, but it also opens the barn doors to all types of credit possibilities.

Why exactly is this the case? Back in the day (we're talking the 1960s) the Fair Isaac Corporation developed a scoring system which lenders could rely upon to determine the probability of timely repayment of loans. Before this, lenders had not much more than a man's (or woman's) word, upon which to rely.

A few decades later, how things have changed. Credit scoring is a lender's first line of defense. Although loan decisions are not made soley on a consumer's credit score (in theory), it can definitely put a damper on a consumer's ability to borrow money, as well as the cost of borrowing money. FICO scores can range from 350 to 850, the higher the score, the better.
I have recent studies indicating that only 1 out of 1300 people in the U.S. have a credit score above 800, whereas 1 out of 8 prospective home buyers have a credit score between 500 to 600.

Take a look at the chart below which illustrates how credit score can affect the interest rate.

For more information, contact a qualified lender.

Annual Percentage Rate (APR): What does it mean?

Calculated by using a standard formula, the APR shows

the cost of a loan expressed as a yearly interest rate and includes the interest, points, mortgage insurance, and other fees associated with the loan. Because the APR takes into consideration all of these costs spread over the term of the mortgage, it is supposed to reflect for the consumer, the "true" cost of borrowing money. It also prevents lenders from hiding fees and any upfront costs from consumers.

All mortgage lenders and brokers are required by federal law to disclose the APR to consumers who apply for a mortgage in a diclosure called the Federal Truth-in-Lending. The APR was conceived as a way for consumers to compare the cost of borrowing among different lenders. However, the way in which the APR is calculated is not neccessarily the same from lender to lender, making this a less-than-perfect method of cost comparison shopping. Additionally, the APR does not take into account loan pre-payments, including early pay-offs.

APRs for Adjustable Rate Mortgages (ARMs) or for Balloon mortgages are less credible as there is no way to know exactly what the interest rate will be during the term of the loan. Thus, certain assumptions about the rate changes are made for the purpose of calculating APRs on ARMs and Balloons.

Therefore, consumers should consider other factors when deciding with which lender they should apply. Those may include the integrity and knowledgeability of the loan officer representing the lender or how long they plan on holding the loan.