How Your Credit Score Affects Your Mortgage Payment

How Much Does Your Credit Score Affect Your Mortgage Payment?

What if I told you that it could save you as much as $9,108 per year on the same mortgage loan if you could increase your credit score from OK to Excellent?

Or that simply spending some time, effort, and probably some money to increase your credit score by just 10 points, from 630 to 640, could save you more than $55,000 over the life of your mortgage loan?

In a groundbreaking study, FindMyWayHome.com compiled data from multiple different sources to analyze how much you can save in your mortgage payment simply by improving your credit score before applying for a mortgage.

“This is huge,” Scott Schang, founder of FindMyWayHome.com, stated: “to see hard data that clearly shows the thousands of dollars you can save by improving your credit score by just a few points is incredibly revealing. Hopefully, this will motivate all of us to actively work on improving our scores.”

“This is even more important right now, as home buyers are looking for every way to reduce their monthly payments due to high-interest rates,” Schang added.

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This study revealed three areas where slight improvements in your credit score can save you money in your monthly house payment:

• The interest rate you pay
• The amount of PMI (Private Mortgage Insurance) you pay
• The amount you pay on your homeowner’s insurance

And, of course, this doesn’t take into account all the other places in your life where having a better credit score and financial situation can save you money and headaches.

Why Does Your Credit Score Affect Your Mortgage?

You may not realize this, but two people applying for the exact same mortgage are charged different interest rates depending on their credit scores.

To understand this, realize that everyone in the mortgage business isn’t actually in the business of lending you money. They’re in the business of making sure the money they lend to you gets repaid. 

It makes sense – if you were to give someone $300,000+, wouldn’t you want to be repaid?

Because of this, they tend to reward those who are more likely to repay with better interest rates and charge higher interest rates to those with a higher risk of defaulting on their loan. And they use your credit score as one of the primary tools to determine how likely you are to repay and charge you more (or less) in your monthly mortgage payments.

Your Credit Score’s Effect On Your Mortgage Interest Rate

The first and biggest savings for having a better credit score is the interest rate of your loan. Though your credit score is not the only thing they consider in deciding whether or not to approve your loan, the better your credit score, the lower your interest rate will tend to be.

Consider the average interest rates and monthly payments charged for a 30-year fixed mortgage as of July 12, 2022, on a $300,000 loan (without taxes or escrow). (To see current rates, click here.) Source: Informa Research Services as reported on myFICO.com

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*On a $300,000 loan (without taxes or escrow)

Differences In PMI (Private Mortgage Insurance)

But having a better credit score doesn’t just affect your mortgage interest rate. Lower credit scores also cause you to pay higher PMI (Private Mortgage Insurance) rates.

Here are the minimum PMI rates from Fannie Mae by credit score, based on how much you paid in down payment. (Note the % rates are shown as an annual rate, and the Monthly Payment is calculated based on a $300,000 loan.) Source: FannieMae.com

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In short, the better your credit score, the less you’ll pay in PMI premiums each month. This is yet another reason to work to improve your credit score before applying for your mortgage.

And there’s a third place where your credit score directly affects your monthly mortgage payment – your homeowner’s insurance policy.

How Your Credit Score Affects Your Homeowner’s Insurance Premium

Insurance companies weigh several factors when determining rates, including your geography, the value of your home, and your history of filing claims. But one major factor is your credit score.

While the data on credit score impact is not as clear in this area, Matic has done a series of studies that indicate that people with lower credit scores pay significantly more than those with higher ones for the same level of house and risk.

Here’s the data from their 2022 mid-year release: (Source Matic.com)

All of this adds up to a significant difference in monthly payment depending on your credit score.

What’s The Total Impact Of Your Credit Score On Your Monthly Mortgage Payment?

Putting all of the above together creates an interesting picture of how much you can save by increasing your FICO scores.

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In short, someone with a credit score of 760 saves $759 in their house payment every month for their $300,000 mortgage ($9,108 less per year) than someone with a credit score of 620, an amazing 38% savings for having excellent credit. 

Raw Data:

*Homeowners insurance amounts interpolated to fit credit score buckets

And, don’t forget those are just monthly payments – when you look at these factors over the lifetime of the loan, a small improvement in your credit score can save you tens of thousands of dollars!

(Chart assumptions: 30-year, $300,000 mortgage, PMI calculated based on a 3.5% down payment rate with PMI expiring after 15 years, 5% inflation rate on homeowner’s insurance.)

For example, increasing your credit score by just 10 points, from 630 to 640 will save you $55,440 over the life of your mortgage! 

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Key Learnings From This Data

Besides the obvious policy issues (is it good public policy to so severely penalize those who have struggled financially? And this data doesn’t include those with credit scores between 500 and 619) this data has several other implications and learnings.

1. Almost everyone who plans on buying a home should do a deep dive into their credit reports several months before home shopping to identify places where they can improve their credit score before applying for a mortgage. 
2. Actively tracking and managing your credit score is a key (and usually underrated) aspect of life in today’s world. 
3. Establishing and prioritizing habits of effective financial management (avoiding late payments, budgeting, carefully considering credit additions and usage) should be considered just as important as habits of exercise, eating well, etc. 
4. Financial and credit management should be heavily emphasized in schools.

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