Credit Rating
Factors that Raise or Lower Your Credit Score (continued)
Mortgages and Credit Scores
How would you like to pay $170,000 more than you had to for a house? Most Americans do not realize how much a low credit score is costing them, particularly when it comes to mortgage loans. The table below shows the average interest rate one would pay for a mortgage loan as of September 2005 based on various credit scores. Note that interest rates vary from week-to-week and from state-to-state. The current mortgage interest rates as you are reading this article are not the same as the ones presented in the table below.
The table indicates that people with low credit scores will pay about $172,000 more for their homes and their monthly payments will be about $475 higher! Think of how big your retirement nest egg would be if you invested that $475 each month in a retirement account for 30 years! This is why your goal should be to acquire a credit score of at least 720, but ideally 750 or higher.
$200,000, 30-year Mortgage
Credit ScoreAPR Monthly PaymentTotal Interest -- 30 Years720 - 8505.79%$1173$222,140700 - 7195.92%$1189$227,888675 - 6996.46%$1258$253,007620 - 6747.61%$1413$308,670560 - 6198.53%$1542$355,200500 - 5599.29%$1651$394,362No matter how low your credit score is today, you can begin work on improving it and eventually obtain a high credit score.
Today, credit scoring plays a big role in determining whether your mortgage loan is approved and at what interest rate. Keep in mind that obtaining a mortgage loan just one point less results in a savings of about $5,000 on the average 15-year mortgage, and much more on a 30-year mortgage. Therefore, it pays to have a credit score as high as possible to enjoy the lowest rate available. Lenders have discovered that there is a direct correlation between credit scoring and the odds of your becoming delinquent on your monthly mortgage payments. Consider the following:
Credit ScoreOdds of Becoming 90 Days Delinquent
Odds of Becoming 90 Days Delinquent780576 to 1700288 to 1680144 to 1660 72 to 1645 36 to 1630 18 to 1615 9 to 1600 4 to 1585 2 to 1As the above table illustrates, those with credit scores below 615 are a very poor risk for any lender.
Research has shown that there is a strong correlation between credit scores and repaying debt. The higher a person's credit score, the more likely they are to pay the debt. For example, consider the following statistics:
- Those with credit scores below 500 are about 85% likely to be at least 90 days delinquent with a payment over a two-year period
- Those with credit scores between 500 and 549 are 71% likely to be at least 90 days delinquent with a payment over a two-year period
- Those with credit scores between 550 and 599 are 51% likely to be at least 90 days delinquent with a payment over a two-year period
- Those with credit scores between 600 and 649 are 31% likely be at least 90 days delinquent with a payment over a two year period
- Those with credit scores between 650 and 699 are 15% likely be at least 90 days delinquent with a payment over a two year period
- Those with credit scores between 700 and 749 are 5% likely be at least 90 days delinquent with a payment over a two year period
- Those with credit scores higher than 750 are only about 1% likely to default on the debt
Because the credit score gives lenders a very good indication of the risk they are taking when they extend you credit, it is impossible to get any sort of financing without having your credit score evaluated. This is also why consumers with higher credit scores pay much less in interest charges than those with lower credit scores and why you should work to raise your credit score as high as you possibly can. As the next topic illustrates, it will save you a fortune.
The most important reason to increase your credit score as much as you possibly can is that a house is the biggest purchase you will ever make in your life and the most expensive. Every half point increase in the mortgage loan interest rate increases your monthly payment, sometimes dramatically if your house is very expensive.
Not only do you save substantially with a higher credit score, some lenders will reward you if your credit score is higher than 725, by lowering your interest rate by about 1/4th of a percent. If it is between 700 and 724, it will be lowered by 1/8th of a percent. This translates in to thousands in saved finance charges and a lower monthly payment. Other lenders might not reward those with good credit scores, but add on interest points for those with bad ones. In any event, it pays to have a high credit score because you will have a lower monthly payment and save thousands in added finance charges.
A credit score around 500 is going to result in paying an interest rate that is two or more points higher than that offered to those with excellent credit. This doesn't sound like a big deal until you realize that it will result in a $200 or more higher monthly payment on the typical $100,000; 30-year mortgage loan. That's at least $72,000 more you're going to pay for your house!
