Protect Your Credit Score Or Pay More For Your Mortgage!

Most people don’t realize how much money it can cost them if their credit scores are less than stellar. For every 20 points your credit score goes down, it can raise your mortgage interest rate between 1/8% and 1/4%. Other types of credit can be more costly as well.

If you need your spouses income to qualify for a mortgage, the mortgage company will use the LOWER of the two scores to determine your interest rate. That is why it is important for BOTH of you to make sure your credit scores are as high as possible.

Let’s boil this down into dollars and cents to see how much MONEY it could cost you if your credit score drops 20 points. To be conservative, we’ll use the lower end of the interest rate increase (1/8%) in the mortgage rate to see how much that will increase the cost of owning a home. Let’s use a 30 year mortgage on a $250,000 loan for our example.

If your score is 740+, you get the best rate which is around 4.0% at the time of this writing. Since there are 3 different reporting agencies and they each have a different scoring model, the mortgage company will take the middle of the three scores. For example, if you have a 745, a 725 and a 709 with the 3 agencies, they are going to use the 725 score even though one of them scored you over 740. Ouch, that just cost you some money! (Hint: If you really want to save some money, go for the 15 year mortgage which is about 3/4% lower than a 30 year mortgage. See the math at the end of this post. You might be shocked) 

So let’s see what happens if your score is 725, as in the example above, instead of 740+. That’s still a GREAT score by the way. But since your rate will go up about 1/8%, it will cost you $19.08 a month more for that tiny bump in the interest rate.

That’s not a big deal, right? WRONG! That may not sound like much but you are going to pay $19.08 for the next 360 months! That adds up to $6,868.80 over the life of the loan! That is some serious cash!

What can cause your score to go down? Late pays, collections, high credit utilization, opening a new charge account, spitting on the sidewalk…OK, maybe not that last one but just about anything else you can think of can cause problems, even closing an old unused account! Here’s a great article from Credit Karma about things that can hurt your scores the most.

I’ve seen people with less than $100 in collections on their credit report with everything else in perfect order and it just killed their credit score! They didn’t even realize the collections were on their credit report. Be sure you are checking your credit report regularly for errors (even though disputes can create havoc on your credit worthiness).

I use AnnualCreditReport.com to check my credit reports periodically. You are allowed one free report per Credit Bureau per year on here so I check a different agency every 4 months to keep up with what is going on. For instance, I check Equifax in January, Experian in May and Transunion in September and then start the process all over again in January. If you want to know what your credit score is, they will charge you a nominal fee for that but as long as I know there are no issues on my report, I usually assume my score will reflect that and stay high.

Let’s examine what you can do to make sure some of these things don’t happen. You could use automatic payments! Set up all of your bills to pay automatically the day they are due. Nearly every company has this feature available now including Utility Bills, Credit Cards and Mortgage Companies. Why take the chance when such a simple fix can help ensure your credit scores don’t suffer from a late payment. If you are laying out on the beach in the French Riviera when your water payment is due, it gets paid on time! One caveat, make sure you have the funds in your account the day it is going to auto-debit your bank account or you could do even more damage to your credit score.

So before I get to the real money saving tip, let’s just wrap up by saying this is entirely preventable if you just put a little effort into it. Sure, it takes some time to set all of these up but if you do like it like my wife and I do, your bill paying life will become much simpler. Every recurring monthly bill we have goes on the credit card and the credit card is automatically withdrawn from our bank account on the due date each month. The only ones we have that won’t take a credit card is the water company and the natural gas company so those are auto-debited from our bank account on their due dates.

As promised above, I’m going to do the math for you on a 30 year, $250,000 loan at 4% versus a 15 year, $250,000 loan at 3 1/4%.

Monthly payments on a 30 year mortgage at 4% are $1,193.54. Multiply that times 360 and you come up with total payments of $429,673.77. Ouch!

Monthly payments on a 15 year mortgage at 3 1/4% are $1,849.22. Multiply that times 180 and you come up with total payments of $332,859.57. Wow! An instant savings of $96,814.20 in interest payments! Sure, your monthly payments are $655.68 higher but for nearly $100,000 savings in interest, I’ll figure out a way to cut back somewhere else or I’ll buy a little less expensive home so I can afford to make the 15 year payments. Either way, it is a very smart financial decision. Buying a home should be a good thing in your life, not a financial disaster!

#RealEstateRoss #Realtor #SugarLand