One of the biggest purchases that you will ever make in your life will be the purchase of your first home. It will be exciting, stressful and joyful at the same time. When you decide that you are finally ready to make this leap, you want to make sure that you are prepared and making the right choice.
Your credit score matters
One factor that is a major component to buying a house is your credit score. By now, you have probably read all the ways your score is impacted when it comes to your debt, making on time payments, etc. When buying a house, your score can make the difference of several thousand dollars over the life of your loan. According to Experian.com, most mortgage lenders will approve a person with a credit score of 620 or higher. However, it may not be the best time to get a home loan with that score due to the increased interest cost that comes along with it.
Let’s do the math
Let’s break it down to see the impact your credit score and the correlating interest rates will have on your budget. The calculations below are based on a mortgage of $100,000 with a 30-year repayment term.
Person 1 has a credit score of 640, which has an average interest rate of 4.00% APR. This results in a payment of approximately $477 before taxes and insurance.
Person 2 has a credit score of 720, which has an average interest rate of 3.625% APR. Based on this rate, there would be a payment of about $455 before taxes and insurance.
Sure, $22 per month does not seem like much. However, when you break it down over 30 years, it is a difference of $7,920 in interest! That is money that will just be given to the financial institution or mortgage company because of your credit score. With that said, keep in mind insurance and additional items may cost more based on your credit score as well. Keep in mind, interest rates can change regularly.
Take the time you need
Be patient and make sure that you make this big purchase with pride. Knowing that you will be paying less interest because you took time to make sure that your credit score was exactly where you wanted it to be for your mortgage payment is definitely something to celebrate!