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HOW YOUR CREDIT SCORE AFFECTS YOUR MORTGAGE PAYMENT

How would you like to pay $170,000 more than you had to for a house?  Most Americans don't 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.

Interest Paid on a $200,000, 30-year Mortgage

Credit Score   APR    Monthly Payment  Total Interest -- 30 Years

720 - 8505.79%$1173$222,140
700 - 7195.92%$1189$227,888
675 - 6996.46%$1258$253,007
620 - 6747.61%$1413$308,670
560 - 6198.53%$1542$355,200
500 - 5599.29%$1651$394,362

No matter how low your credit score is today, you can begin work on improving it and eventually obtain a high credit score.

Today, credit scores plays a big role in determining whether or not your mortgage loan is approved and at what interest rate.  Obtaining a mortgage loan at an interest rate just one point less results in a savings of about $5,000 on the average 15 year mortgage, and significantly more on a 30 year mortgage (about $50,000).

Why do lenders use your credit score in their lending decisions?  Because they discovered that there is a direct correlation between your credit score and the odds of your becoming delinquent on your monthly mortgage payments. Consider the following statistics the mortgage industry has compiled:



If Your Credit Score Is

780
700
680
660
645
630
615
600
585
Your Odds of Becoming 90 Days Delinquent are

576 to 1
288 to 1
144 to 1
72 to 1
36 to 1
18 to 1
9 to 1
4 to 1
2 to 1
As the above table illustrates, those with credit scores below 630 are not a very good risk, so they will obtain a mortgage at a significantly higher interest rate and this will add anywhere from $50 to about $250 to their monthy mortgage payment and add thousands to the price of the home. 

If your score is 660 or above, you can get a mortgage loan fairly easily since you are a pretty good risk. As stated above, the higher your score the lower your interest rate, so your goal shouldn't be to obtain a credit score of 660; it should be to achieve a credit score of at least 700.  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. 

Does an interest point or two make such a big difference in the price of the house?  You bet it does!  It means saving  thousands in finance charges and a lower monthly payment.  For example, paying an interest rate just two points higher means paying an additional $200 each month on your house payment on the typical $150,000, 30-year mortgage loan.  That's at least $72,000 more you're going to pay for your house! 

There are steps you can take to raise your credit score or overcome a low credit score:

  • Offer a larger down payment so that you aren't borrowing so much money
  • Lower your debt-to-income ratio by paying off as much debt as you possibly can before applying for a mortgage loan in order to increase your credit score
  • Don't buy a car just before applying for a mortgage loan as it lowers your credit score
  • Try to improve your credit score before you get a mortgage loan through rapid rescoring, which is the next topic.

Next topic: Rapid Rescoring
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