It’s common knowledge that having a good credit score will help you get a better interest rate on your mortgage. However, a new study has shown that a good credit score can save homebuyers tens of thousands of dollars.
In a recent study by Zillow, researchers found that a borrower with a fair credit score (between 640-680) will pay as much as $720 per year more for a mortgage on the same home as someone with an excellent credit score (760+).
Zillow analyzed more than 100,000 mortgage quotes from lenders between March 18 – May 8, 2018, limited to 30-year fixed rate conventional and conforming purchase loans for borrowers with no self-reported history of foreclosure or bankruptcy.
The report points out that, “nationally, a borrower with an ‘excellent’ credit score could get a mortgage with a 4.50 percent Annual Percentage Rate. A similar borrower with a ‘fair’ credit score could get a 5.10 percent rate. Over the lifetime of a 30-year mortgage, this means a buyer with a fair credit score can end up spending $21,000 more than a buyer with an excellent credit score for the typical U.S. home.”
Over the lifetime of a 30-year mortgage, therefore, the homebuyers with the “fair” credit score would pay $21,000 more for their home than an homebuyer with an “excellent” credit score.
Homebuyers with a Higher Credit Score Save Money
Past financial choices often impact our financial future, especially when those decision are reflected in our credit score.
In the Zillow report, this impact is more noticeable when purchasing a higher cost home. “…the penalty for a lower credit score tends to be higher in more expensive areas. In San Jose, where the median home value is $1.3 million, a buyer with a lower credit score can end up paying $129,000 more than a buyer with an excellent credit score over the full life of the loan.”
As for Tampa, where homes are more moderately priced with a median home value of $201,000, a person with an excellent credit score might get a 4.57% mortgage, paying $296,000 over the lifetime of a 30-year loan. Someone with a lower credit score may get a 5.09% mortgage, paying $314,000 of the lifetime. That is an $18,000 difference.
“When you buy a home, your financial history determines your financial future,” said Zillow senior economist Aaron Terrazas. “Homebuyers with weaker credit end up paying substantially higher costs over the lifetime of a home loan.”
How Does Your Credit Score Impact Your Mortgage Interest Rate?
For the study, Zillow broke down credit scores into five categories: Excellent > 760, Very Good 720 – 759, Good 680 – 719, Fair 640 – 680, and Poor < 640.
Although your mortgage intertest rate isn’t based on your credit score alone, it is an important factor that lenders use to assign risk. A higher credit score indicates less risk, so lenders offer a lower interest rate. Conversely, a lower credit score indicates more risk, so lenders offer a higher interest rate.
If you are thinking about buying a home or refinancing as existing mortgage, working to have the highest possible credit score can save you thousands of dollars over the life of the loan.
Marimark Mortgage is based in Tampa, Florida and serves the mortgage needs of homebuyers, homeowners, and investors in Florida, Virginia, and Pennsylvania.
We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.