may not realize it, but your credit score has a big impact on your home buying power! The Motley Fool recently published a great article showing the relationship between credit scores and mortgage interest rates. We’re sharing a few highlights here, along with our own suggestions to help improve your credit score!
Here’s some examples using amortization calculators at MyFICO.com. Say you’re borrowing $200,000 and using a fixed-rate, 30-year mortgage, and you have a FICO score in the 760 to 850 range. At the time of this blog post, that would get you an interest rate of 3.28%. This would create a monthly principal and interest (P&I) payment of $874.
If your score is in the lower range, between 630 and 650, your mortgage rate offering would be 4.87%. This doesn’t sound too bad at first, but you’ll be paying $184.00 more per month, with a P&I payment of $1,058. That’s an extra $2,208 per year!
Investing time and money in improving your credit score will help you get the best mortgage offers, which in turn will save you money for years to come. Here’s a few ways to do it:
Obtain a free copy of your credit history from annualcreditreport.com. If there are any errors, or you disagree with something in your history, file a dispute with the reporting agency. Allow 30-60 days for the disputed item to drop off from your report. Be prepared to back up your claims with proof of payments, ect.
Resolve any collection accounts. A single item in collection can cause serious damage to your credit score. Tip: when negotiating with a collection agency, make it clear you want the reporting removed entirely in return for your payoff. Having the item removed from record heals your score faster than having it show as paid-in-full.
Pay down your consumer debt. Ideally, you shouldn’t be carrying a balance that’s greater than 10% to 30% of your available credit limit. Paying down debt will improve your score and save you money on interest charges. It’ll also improve your debt-to-income ratio, which boosts your home purchase power.
Don’t close old accounts, even if you’re not using them. Your credit score will drop temporarily when you close accounts. This is because FICO treats accounts “closed by creditor” the same as those “closed by consumer.” In FICO’s eyes they are both negative events, though this logic is questionable.
Do not open new lines of credit that you do not need. New debt is seen as a higher risk and will temporarily drop your score. As the debt is established with a good payment record, your score will recover. Still, it’s best not to open department store accounts willy-nilly.
Ready to apply for a mortgage? We will be happy to refer you to trusty, local lenders in Chicago and the Northwest Suburbs!
StartingPoint Realty – serving first-time Chicago home buyers!
StartingPoint Realty specializes in serving first-time home buyers throughout Chicago and the Northwest suburbs. We provide complete education and guidance during the entire home buying process!
Be sure to attend a free home buying seminar to learn about Chicago home buying! Always feel welcome to contact us for help with your Chicago home buying questions!
Ryan Gable Broker/CEO Starting Point Realty
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