Mortgage rates have climbed higher over the past week, making it even more important for consumers to do everything they can to get the lowest rate possible when buying a home.
That’s especially true for home buyers with lower credit scores, says Jonathan Smoke, chief economist for Realtor.com.
Smoke analyzed 170,000 mortgage loans processed between Sept. 1 and Nov. 7 to compare the rates borrowers were able to lock in for 30-year fixed-rate mortgages, based on their credit scores.
People with higher credit scores, which typically measure creditworthiness on a scale of 300 to 850, were generally able to lock in lower mortgage rates. Even raising your score by 25 points can lead to big savings, he found.
But once consumers went beyond a certain threshold, the benefits of having a higher score diminished, Smoke found. After a certain point, borrowers need to rely on other factors to improve their rate, such as their income or the type of loan, housing experts say. That is especially true for borrowers with credit scores above 700, they say.
“There are practical limits as to the effect on your mortgage rate vis-à-vis your credit score,” says Keith Gumbinger, vice president of the mortgage information website HSH.com.
Mortgage rates have risen a bit since Smoke crunched these numbers, but there are still some takeaways from consumers about how much your credit score can affect your mortgage rate. Here’s a look at what he found for each batch of credit scores:
Below 625: It may be difficult to have your mortgage loan approved if your score is below 625, Smoke says. Even if you are approved for a loan, chances are the rate may be on the high end. It may be smart to improve your score and other parts of your finances before you apply, he says.
625 to 650: Borrowers with this range of scores saw quite a difference in terms of the mortgage rate they were able to secure. For borrowers with a credit score between 625 and 650, the median rate was 3.88 percent. The 10 percent of mortgages with the highest rates in this group had rates of 4.5 percent or higher, Smoke found.
650 to 675: The median mortgage rate for borrowers in this group falls to 3.75 percent. Even the borrowers receiving the highest mortgage rates in this group are starting to find better deals. Ten percent of borrowers in this group had rates of 4.38 percent or above.
675 to 700: Once again, the median rate is 3.75 percent, but the rates seen on the high end are coming down further. The 10 percent of mortgages had rates of 4.25 percent or higher.
700 to 725: The median rate offered is still 3.75 percent. But borrowers with the costliest loans had rates of 4.12 percent and up.
725 to 750: Borrowers who have credit scores above 725 are introduced to the next tier of lower interest rates. The median rate here drops at least to 3.62 percent after staying mostly flat for borrowers with credit scores of at least 650. The 10 percent of borrowers with the highest mortgage rates in this group had rates of 4 percent or higher.
Above 750: The median rate for borrowers in this range is still 3.62 percent. But the range of rates given to borrowers is narrowest here, for the borrowers with the best credit. The most expensive mortgages had rates of 3.88 and above.
Consumers can use certain tips and tricks to boost their credit scores, such as paying their bills on time each month. It also helps to keep balances on your credit cards below 30 percent of the available credit.
Once your score is as high as you think it will be, you can take other steps to lower the costs of your loan, such as providing a bigger down payment or paying a fee to receive a discounted rate.
And above all, don’t forget to shop around by comparing rates from lenders to make sure you’re receiving the best deal.