How your credit score affects your mortgage rate

Lenders price rates in tiers

Mortgage lenders group borrowers into credit-score bands and assign each band a rate. The higher your score, the lower the rate band you fall into, because a higher score signals lower risk to the lender. The jumps are not perfectly smooth, but in general, crossing into a higher tier can drop your rate noticeably, while small moves within a tier may not change it at all.

What the gap is worth

Because a mortgage is large and long, even a fraction of a percentage point compounds into real money. A lower rate means a lower monthly payment and far less interest paid over the years you hold the loan. That is why, if your score is close to the next tier, it can be worth a few months of focused effort to cross it before you lock a rate, especially on a refinance you are not in a rush to complete.

How to improve your tier

• Pay every bill on time; payment history is the largest factor in your score.
• Lower your credit utilization by paying down revolving balances before you apply.
• Avoid opening new accounts or taking on new debt in the months before you shop for a mortgage.
• Check your credit reports for errors and dispute anything inaccurate, since a single mistake can cost you a tier.

When you are ready, get rate quotes from a few lenders in the same short window so the inquiries count as one, and compare the all-in cost rather than just the headline rate. Your score sets the tier you start from, but shopping is what gets you the best offer within it.