How Your Credit Score Affects Your Mortgage Interest Rate

Rachel — Thu, 17 Nov 2016 08:26:14 +0000

How Your Credit Score Affects Your Mortgage Interest Rate Rachel Thu, 11/17/2016 - 03:26

How credit score affects your mortgage cost
Image Source: StockSnap.io user Drew Coffman.

After years of rock-bottom interest rates, mortgage rates are slowly climbing upward. For those who are planning to buy a home, it’s important to understand the importance of your credit score when it comes to affording a home. Many people worry simply about getting approved for a home loan, but the larger concern should be getting a reasonable interest rate—and your credit score is one of the primary factors driving the interest rates you’ll be offered.

New Study Shows Credit Score is Primary Determiner

A recent study by Realtor.com examined 170,000 mortgages written in a two-month period in Fall 2016, and the results are illuminating. They examined 30-year mortgages under a fixed rate loan and the credit scores of those who obtained the mortgages.Unsurprisingly, those with higher credit scores obtained mortgages with lower interest rates. In addition to credit score, the borrower’s income, other debt load, and the type of loan affected the rate offered.
The study also showed that raising your credit score by as little as 25 points can get you a much more favorable interest rate on your mortgage. For those with higher credit scores, the other determining factors played more heavily into the rates they were offered, including income, stability of income, type of loan, and how much other debt they were carrying. In short, the mortgage lender wants to see right away that you can afford the loan and that you’re not up to your neck in other debt.

How Much Can Your Interest Rate Change Based On Score?

The same study showed a median interest rate of 3.62% for those with credit scores from 725-850. A 25-point drop between 725-750 could see those borrowers paying as high as 4% compared to a high of just 3.88% for those in the next highest tier. Once you drop below 725, the numbers skew more. At 700-725, median scores are 3.75% and can stretch up to 4.12% depending on other factors.
Dropping down to a FICO score of 675-700 means your outer limit could be as high as 4.25%. When it gets down to 650-675, the rates scoot out to 4.38% and to 4.5% for those between 625-650 credit score. Below 625 and you’re not likely to be approved for a mortgage and, if you are, the terms might be very disadvantageous. Rather than taking the hit, why not work on your credit score first and postpone applying for a mortgage until you’re better prepared?

How Much Does This Really Cost You?

On a $250,000 home with 5% down ($12,500), the median rate for the highest tier of credit scores (3.62%) would give you an estimated monthly payment of $1,08.45. At the next tier, 3.88% interest bumps you to $1,117. One more drop down to the outer limit of 4.25% will take you up to $1,168. Drop to the 4.38% rate and you’re at $1,186.50. The 4.5% rate takes you to $1,203.38. This may not seem like that big of a deal, but the disparity can increase between payments if you can’t put 5% down and the principal is greater.
With the most affordable loan above (3.62%), you will pay$152k in interest. At the higher 4.5% rate from the lowest credit score calculated above, the interest jumps to $195k. The total of interest payments is $433k at the higher interest rate and $389k at the lower rate. That’s $44,000 that could have gone into your retirement account or other investment. You could put that $1,428 a year difference into your 401(k), and it could turn into almost $125k extra to see you through your golden years.

The bottom line is that a better interest rate driven by a higher credit score will save you money in the long-run on your mortgage, make it easier to manage your finances, and put more money away into retirement savings. If you’ve gone through a bankruptcy, you can still work to improve your credit score to get approved for a mortgage. To find out more, contact Credit Score Keys today for a free consultation about boosting your credit score after bankruptcy. Call 919-495-2365.

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bad credit

bankruptcy

mortgage

Why You Should Stay in Your House Even if You Can't Pay Your Mortgage

master — Fri, 17 Oct 2014 14:41:56 +0000

Why You Should Stay in Your House Even if You Can't Pay Your Mortgage master Fri, 10/17/2014 - 10:41

If you can't afford to pay your mortgage payments and know you won't be able to get caught up, bankruptcy can be an excellent way to shed that debt, related debts and unsecured liabilities so that you can get a financial fresh start. But it's important to know that even if you stop making mortgage payments, you should absolutely not move out of your house. If you move out sooner than is wise, you can end up getting yourself in much worse financial trouble.

How Mortgage Differs from Rent
If you stop paying your rent, it's a pretty simple matter for your landlord to evict you and they can do so with minimal notice. But because you're the property owner, you will have a much more flexible time frame. Your lender doesn't own your home, they simply have rights to it as collateral for your loan. When you don't pay your mortgage payments, the lender files a foreclosure.
This triggers a sale of your home to satisfy the debt. What usually happens is that it's the lender that buys the home at the sale if the home has some value. Once the home sells at the foreclosure auction, there is a new property owner and it is up to them to serve you notice of eviction. This entire process can take months or even a year or more and leaving before you have to is a risk.

Don't Leave Your Home Until the Last Moment
If you leave before your home has gone through foreclosure and the new owner (the bank or someone else) has demanded that you leave the property, you can still be liable for what goes on there. If you have a homeowner's association, they can charge fees if the property isn't kept up to community standards and some municipalities assess fines for overgrown yards or homes in disrepair.
By staying in your home, you can make sure it's kept up and that there are not fines accumulating. Not only that but because you're not paying your mortgage and not paying rent on a new place, you can sock money away for a deposit on a rental home or apartment, moving expenses and utility deposits. You may want to go ahead and pay your homeowner's association fees, though, even if you're not paying the mortgage so they don't try and get a judgment and put a lien against your bank account.

Why It's Wise to Postpone Bankruptcy Until After Foreclosure
Some consumers that are behind on their mortgage payments will file bankruptcy to try and stop foreclosure, but if you can't afford your house, you're just postponing the inevitable. But here's the kicker, if you file bankruptcy, that will postpone the foreclosure and impact the debts that you've already amassed.
But debts associated with your home, like homeowner's association fees, that continue to amass after your bankruptcy but before the foreclosure will not be covered by the bankruptcy so you will end up out of your home eventually and with a pile of debts that you won't be able to escape because you can't file another bankruptcy until after a significant waiting period.

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mortgage