Lenders use credit scores to partially determine the interest rates for mortgages. A high credit score will be given low rates, and a low credit score will be given high rates. So a borrower’s credit score is inversely proportional to their interest rate. High and low scores are easy to calculate, but what about average scores? How does an average credit score affect mortgage interest rates?
Average Credit Scores
Currently, the national average credit score is 680, twenty points lower than the benchmark of 700. An ‘average’ credit score, however, may be defined as any score between six hundred and seven hundred. Let’s say that 650 is a good approximation. So 650 is the average credit score of a hypothetical borrower, named Tom. Tom wants to take out a mortgage on his home. What kind of mortgage interest rates can he expect?
Credit Scores And The Secondary Mortgage Market
Before answering that question, take a look at a perplexing quandary. Lenders can use credit scores to determine interest rates. Yet mortgage rates are also set by the secondary mortgage market, right? How does this work? The trick is to remember that credit scores come before the mortgages are sold through the market. Lenders calculate interest rates based on credit scores, than the loaned mortgages are sold through the market to investors, who then vote those securities up or down as they see fit.
Tom’s Rate
Going back to Tom, the outlook for his mortgage is pretty bleak. If he had a credit score of 650, he would not quality for even moderately good rates. A borrower needs a score of 720 or higher to qualify for the best interest rates. So even the borrower with the national average would still be off by forty points. Therefore, the best way to secure the best mortgage interest rates is to raise your credit score as soon as possible.
Related posts:
- What Credit Score Do I Need To Qualify For A Conventional Home Mortgage Loan?
- Does Having A High Credit Score Decrease My Mortgage Rate?
- How Does My Credit Score Impact My Ability To Get A Mortgage Loan?
View full mortgage loans post on US Mortgage Rates
Tags: credit, Mortgage, US, interest, national average credit score, score, Average
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