Higher Credit Scores Mean Lower Mortgage Rates
By Stacy WilliamsUnderstanding the secrets of how consumer credit works can help consumers increase their credit scores, get lower mortgage rates, save money and beat the recession!
As the American economy begins to emerge from the worst financial crisis in recent memory, consumers are once again considering one of the largest financial decisions they’ll ever make: the purchase of a home. Because the mortgage industry was particularly hard-hit by the recession, some potential home buyers may be uncertain about the possibility of even qualifying for a mortgage. One rule still holds true, though: even if standards for obtaining a home mortgage are more stringent, higher credit scores mean lower mortgage rates.
Potential home buyers are concerned about credit
Now that the economy is beginning to show signs of recovery, Americans are once again considering buying homes. They’re concerned, however: they want to know how the recession affected their ability to qualify for a mortgage. Many consumers, hard-pressed financially during the recession for many different reasons, may have experienced significant changes in their credit scores. Unemployment, for example, may force consumers to pay for more of their purchases with credit, increasing their ratios of debt-to-credit and debt-to-income. Others may find themselves unable to pay their bills. In both cases, credit scores are adversely affected.
Why do higher credit scores mean lower mortgage rates?
Credit scores are evaluations of a consumer’s credit-worthiness – that is, consumer credit agencies use complex formulas to evaluate a consumer’s recent credit history generate a score. The higher the score, generally in a range from the mid-400’s to the low 800’s, the more credit-worthy the consumer is. Mortgage lenders are eager to lend to people with higher scores, the way they compete is by offering these consumers lower rates. Thus, higher credit scores mean lower mortgage rates.
How is a credit score increased?
There are some elements of a credit score that can have an adverse impact for many years, such as bankruptcies, foreclosures and legal judgments against the consumer. Other elements, such as payment history and the debt-to-credit ratio, have a much shorter-term impact, and it’s these that Americans can affect to increase their credit scores. The easiest way to increase a credit score is to reduce the ratio of debt to credit.
Increasing a credit score by paying down debt
The quickest way to decrease the debt-do-credit ratio is to pay down debt. A good debt-to-credit ratio (where “credit” is the total credit limit available from all open accounts) is considered to be about 30% – 35%. As this ratio increases, the credit score will decline. This is also why it’s not generally considered to be a good idea to close credit accounts, even if they’re no longer being used – reducing the amount of credit available automatically increases the ratio of debt to credit.
Patience and discipline may lead to lower mortgage rates
Because higher credit scores mean lower mortgage rates, and because consumers with a debt-to-income ration greater than 35% or so can increase their credit scores quickly by reducing their debt-to-income ratios, they may be well advised to postpone their purchase for a short period of time (six months or so) while paying down debt and driving up their credit scores.
Related posts:
- Are Mortgage Interest Rates And Credit Scores Related?
- Can a Great Credit Score Guarantee the Best Mortgage Rates?
- Are Mortgage Interest Rates A Lot Higher With A Bad Credit Loan?
- How Are Mortgage Interest Rates And Credit Scores Related?
- Does My Debt To Income Ratio Affect My Mortgage Rate?
