How Does a Low Credit Score Affect My Interest Rate?
Lenders estimate your ability to pay back money based on your credit score. The risk factor they take on is built-in to your interest rate as a financing fee. Therefore, a low credit score results in a higher interest rate, higher monthly fees, and a higher amount of interest being paid over the total life of the loan.
Referring back to our chart, a borrower with a credit score of 620 would be questionable to an underwriter. While the lender may agree to provide financing, the increased interest rate is factored into the monthly payment. The following chart illustrates the difference in the amount of interest paid over the life of the same loan with three different credit score scenarios.
A borrower who increases his or her credit score from 620 to 720+ can potentially save $601 per month on mortgage payments, $7214 per year, and approximately $216,432 over the life of the 30-year loan.*