New Study Shows the Effect of Low Scores on Mortgage Loans
A poor credit score can cost you a lot of money when you take out a mortgage.
A recent study by Zillow shows that the higher interest rates from a poor credit score can add at least $21,000 in additional interest to a mortgage, but often it’s even more than that.
Zillow analyzed over 100,000 mortgage quotes offered on Zillow Mortgages across the nation between March 25 and May 5.
It Doesn’t Take Much
Using the nationwide median home price of $213,100 and a 20 percent down payment as a reference point, Zillow found that potential borrowers with excellent credit (above 760) could qualify for a 4.5 percent interest rate on a thirty-year fixed-rate mortgage.
Borrowers with merely fair credit scores (640 to 679) could only qualify for a 5.1 percent rate. A change of 0.6 percent doesn’t seem like much, but the differences add up.
In this case, the drop from excellent to fair credit will cost you approximately $21,000 over the life of a thirty-year loan.
More Profound Effects
If you live in a market where homes are more expensive, the effect is even more profound. Apply the above example to San Jose ($1.3 million median home price), and the credit drop costs an additional $129,000.
Conversely, in a relatively inexpensive urban market like Pittsburgh, where the median home price is $135,465, the credit score drop only costs $9,000.
When you’re in the fair credit range, even a small increase has large positive effects. By bumping your credit score from the fair range to the good range (680-719), your interest rate offer for the national median home would decrease from 5.1 percent to 4.6 percent — bridging most of the gap between fair and excellent credit.
Save Money with Good Credit
According to Zillow’s data, on the national scale, simply moving up from fair to good credit would save you $16,000 over the life of a 30-year loan.
Not every market follows the national example. In Cincinnati, Zillow found that the rates for excellent, good, and fair credit were 4.7 percent, 5 percent, and 5.2 percent respectively.
In that market, going from fair to good credit saves $5,000 over the life of the median home loan while going from fair to excellent credit saves $12,000.
See the Impact
The Zillow study shows the credit score effects on median home costs for 53 urban markets. If you live in one of these markets, you can see the effects directly.
If not, you can estimate the effects by finding the median home price for your market and using an online calculator to run different interest rate scenarios.
You can see why a higher credit score is important – but do you know how to get one?
Make sure that you always make all of your monthly payments on time with at least the minimum amount due. Your payment history is the largest contributing factor to your credit score.
Keep Your Ratios Low
The second largest factor in a credit score is the total amount you owe. Keep your overall debt-to-income (DTI) ratio and your credit utilization ratio – the amount of credit you use versus the amount you have available – as low as you can.
Finally, check your credit report regularly to make sure there are no errors or signs of fraudulent accounts that could be inadvertently dragging down your score.
If you plan to buy a home, check your score three to six months before you intend to buy, and periodically until you do buy. You may need time to raise your score – and, thanks to Zillow, you now know how much you can save by doing so.
This article was provided by our content partners at MoneyTips. Photo ©iStockphoto.com/kosmin
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