Credit score

As mortgage rates soar, credit scores are more crucial than ever

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As mortgage rates fell to record lows during the pandemic, they have surged, officially hitting 5.27% last week for the first time in more than a decade.

The jump was mind-boggling to many, as just six months ago, 30-year mortgage rates were hovering just above 3%. The sudden rise isn’t all that shocking though – it’s what the Federal Reserve had hoped for in terms of suppressing a rise in inflation. That said, rising interest rates combined with an out-of-control housing market has caused some Americans to simply give up on the idea of ​​buying a home, at least until things start to calm down.

The good news is that while economic forces may be beyond our control, one of the most important components of mortgage eligibility — your credit scoreis still largely under your control. Regardless of the current interest rate situation, maintaining a great credit rating can save you hundreds of thousands of dollars in interest over the life of a 30-year mortgage.

Below, Select details the reasons behind the recent spike in mortgage rates and how your credit score can help you get the lowest interest rate possible — and help you save money along the way.

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Mortgage rates hit their highest level in 12 years

One of the most important factors prospective homeowners should consider, besides the purchase price of their home, is the interest rate they will receive on their mortgage. While the pandemic provided record highs, that trend is now over.

On April 14, 2022, 30-year mortgage rates officially rose by more than 5%, and on May 5, the average interest rate hit 5.27% according to the St. Louis Federal Reserve Bank, meaning the cost of borrowing to buy a home is rising for all Americans.

For example, if you were to buy a house for $300,000 with a 10% down payment ($30,000) and you received a 3% interest rate on your mortgage, you would have paid 139,799.12 $ in interest over 30 years. But if your rate is 5.27%, you’ll pay $267,946.70 in interest, which is almost double the total interest on the 3% mortgage.

While these numbers may seem daunting, they don’t automatically mean it’s not worth owning right now.

“Rising rates don’t necessarily mean it’s not a good time to buy a home,” Robert Heck, Morty’s vice president of mortgages, told Select. “[Mortgage rates] have not yet reached a level where they could send demand and accessibility into a steep downward spiral, even though they have had an impact on accessibility. This momentum has been aided by limited inventory and persistent demand for what is available.”

According to Heck, rushing to buy a home because of interest rates or other economic factors is not a good idea. “Buyers should focus on planning for all the expenses of owning a home right now,” he says.

In addition to paying attention to costs such as maintenance, taxes and insurance, potential buyers should focus on getting the best mortgage they can find with the lowest possible interest rate. To secure that low rate, much of the process boils down to one central factor: your credit score.

How Consumers Can Get a Low Interest Rate

Your first step in buying a new home should be to begin the pre-qualification process, which means contacting lenders to see if they will approve you for a loan, and lenders checking your credit score to see if you qualify.

Before you start applying for a mortgage, check your credit score to get an idea of ​​the types of interest rates you’ll qualify for. If your credit score isn’t perfect, it’s also a good way to find out what could be bringing it down, whether it’s credit card or student debt, late payments or any other factor. Note that every point you manage to raise on your credit score can make a significant difference in the amount of interest you’ll have to pay on your mortgage, which could save you thousands of dollars in the long run.

For example, if you take the example above and buy a $300,000 house with a 10% down payment and have an interest rate of 5.27% on your loan, the total of your interest paid over 30 years would be $267,946.70. With a slightly higher interest rate of 5.5%, you would pay $281,890.91 over 30 years, a difference of nearly $14,000.

If you didn’t have great credit and could only receive the 5.5% rate, you’d end up paying $14,000 more over 30 years, which works out to $38.88 more per year. month. Although this is a relatively small difference, if you had a higher credit score, you would have received a better interest rate, and each point reduced in your rate is money in your pocket rather than going to your lender.

Getting a good interest rate and terms on your mortgage isn’t just tied to your credit score, but also to your lender. Select ranked on best mortgage lenders and found Rocket Mortgage, Chase Bank, Ally Bank, PNC Bank, SoFi to be among the best, based on types of loans offered, customer support, and minimum down payment, among other factors .

How to quickly raise your credit score

If you’re looking to boost your credit score fast, here are some ideas to get you started:

Request a line of credit increase

If you already have credit cards, this means you already have an assigned line of credit showing how much you can spend. This is called credit utilization and accounts for 35% of your overall credit score.

For example, if you have $25,000 in a global line of credit on three credit cards and you are currently only using $3,000, that means your utilization rate is 12%. If you were to call the credit card issuers and increase your overall line of credit to $40,000, your utilization rate would drop to 7%.

The lower your credit usage, the better your credit rating will be. There are two easy ways to get a higher line of credit: either by updating your income if you recently received a raise, or by simply calling your credit card issuer and asking for one.

Check your credit report for errors or evidence of paid accounts

There’s always a small chance that your credit report contains errors, so it’s a good idea to check it from time to time. About 25% of Americans have noticed some sort of error in their credit reports, usually in the form of fraudulent or duplicate accounts. If you come across anything questionable, contact the credit bureau you are consulting to correct the problem as soon as possible. possible. If you happen to have accounts that have been recovered and have since been paid off, such as medical debt, you can also request that these accounts be removed from your credit report.

You can monitor your credit with a free credit monitoring service, like Experian or Chase Credit Journey, which will help you understand your credit score and figure out how to raise it if needed.

Experian Dark Web Scan + Credit Monitoring

On Experian’s secure site

  • Cost

  • Credit bureaus monitored

  • Credit score model used

  • Dark web analysis

  • Identity insurance

Chase Credit Journey

  • Cost

  • Credit bureaus monitored

  • Credit score model used

  • Dark web analysis

  • Identity theft insurance

Also consider using a service like *Experian Boost™, which helps you get credit for on-time utility, telecom and Netflix® payments. Signing up for the service is free, and the average increase in FICO® score ends up being around 13 points.

Experian Boost™

On Experian’s secure site

  • Cost

  • Average increase in credit score

    10+ points, although results vary

  • Affected credit report

  • Credit score model used

Become an authorized user on someone else’s credit card

If you have a trusted friend or family member who pays their bills on time, it might be helpful to have them add you as an authorized user. By doing so, you will eventually get “credit” and it will positively affect you every time they pay their credit card bills on time. For most credit cards, this process is completely free and only takes a few minutes.

At the end of the line

Your The credit score is one of your greatest allies when it comes to buying a new home. The higher your credit score, the more likely you are to be pre-approved for a mortgage by multiple lenders, in which case you can go ahead and choose the one with the lowest possible rate – having multiple mortgage lenders vying for your business can end up saving you thousands of dollars.

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*Results may vary. Some may not see an improvement in scores or approval ratings. Not all lenders use Experian credit reports, and not all lenders use scores impacted by Experian Boost.

Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.