A Low Credit Score Costs Home Buyers Big—Here's How Much
Courtesy of realtor.com
With skyrocketing home prices and rising mortgage rates, many home buyers are frantically looking for ways to cut down on costs wherever they can. But in one area, it makes sense to ramp up spending, experts say—paying off old bills, debts, and credit cards.
That's because a very good credit score can save home buyers tens of thousands of dollars over the life of their mortgage, according to a recent report from online financial services marketplace LendingTree. That's not chump change.
LendingTree estimates borrowers with very good credit scores of 740 to 799 can save $29,106 over those with a fair credit score of 580 to 669. The savings would be on the annual percentage rate of a 30-year fixed mortgage of $234,437, which is the average size of those loans, according to the report. Those savings are the price of a decent new car.
Aside from monthly costs, it's a lot harder to get a loan with poor credit.
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“When you’re taking out a mortgage, you’re asking a lender to invest in you for a very long time," says Kali McFadden, senior research analyst at LendingTree.
"If you have a higher credit score, it means statistically you’re more likely to pay your bill on time," she says. But "if you have a lower credit score, lenders are taking a bigger risk that you’re not going to pay your mortgage off or [you'll go into] foreclosure."
Credit score sweet spot
The ideal credit score is from 760 to 780 and up, McFadden says. Anything much below that and lenders are more likely to charge a higher interest rate or pile on more fees to compensate for the risk that the borrower may miss payments.
She recommends that would-be borrowers get their credit reports and resolve any outstanding issues before applying for a loan. They should also pay down or pay off old balances, not open or close any credit cards, and pay their bills on time.
That's not to say every lender will offer rates to those with sterling credit, says Don Frommeyer, a mortgage loan originator at Marine Bank in Indianapolis. But some will and others will knock off various charges, such as filing and overnight fees.
In addition, many buyers will save substantially less over the life of their loan. That's because after five or six years, many are likely to refinance their loan or move into a new home requiring a new mortgage.
Still, buyers should focus on boosting their credit score.
"You always save money with a higher credit score," Frommeyer says. But "you can pay a fee for a lower credit score."