Buying a house or condominium is probably the biggest purchase of your life. Aside from the down payment, closing fees, lawyers fee and a host of other fees you’ve probably never heard of, the actual interest rate you get on your mortgage is a huge factor in determining the total cost of your purchase. Mortgages and credit scores are inversely related – the higher your credit score, the lower your mortgage because you get a better interest rate. And remember, interest is compound – so you’re paying interest on your interest. For that reason, half a percent here and there on your interest could result in tens of thousands of $$ in savings or more.

How to calculate your mortgage

A quick and simple way to see how mortgages and credit scores are related is to play with the numbers yourself. Take a look at this free mortgage calculator and input a few different scenarios for loan amounts and interest rates. The most important factor in determining your interest rate is your credit score.

How are mortgages and credit score related?

Your FICO credit score is a numerical value between between 300 and 850. Simply put, this number tells creditors how risky it is for them to give you money. When a bank gives you a loan, the want to know what are the chances that you’re going to pay it back on time. The higher your credit score, the less of a risk you are to a lender, so the lower your interest rate will be. The lower your score, the riskier you are, and to offset that, the bank will give you a higher interest rate.

How do I get a mortgage with bad credit?

Remember, you still can get a mortgage is your credit isn’t perfect, it will just come at a higher cost. Unfortunately, with the housing collapse, getting a good mortgage can be tough if you have a low credit score, but it doesn’t mean you won’t get any mortgage at all. The best solution is to try to improve your credit score. Of course that takes time, but it’s important because it can save you a ton of money in the end.