Monday, March 16, 2015
Credit Score Can Affect Your Mortgage Interest Rate
Do you ever wonder how credit score affects your mortgage interest rate and fees?
1. Your Interest Rate May Be Higher Lower credit scores may be subject to higher interest rates and finance charges over the course of any loan. The website myfico.com offers a mortgage payment calculator that is updated regularly to show consumers how their FICO score can affect their interest rate. According to myfico.com, a credit score of 620 versus 720 on a 30-year Fixed Rate Mortgage of $300,000 could cost approximately $110,000 more over the life of the loan in interest charges. Interest rates are determined by many factors but the bottom line is that individuals with lower credit scores will pay nearly three times more in interest than those with higher credit scores.
2.Your Closing Costs May Be Higher Consumers with lower credit scores may be subject to higher closing costs. Known as loan pricing adjustments, these are fees based on your loan amount, implemented by Fannie Mae and Freddie Mac in 2010 to accommodate for the risk associated with lower credit borrowers.
3.You May Pay More For Private Mortgage Insurance (PMI). PMI is insurance that mortgage lenders require from most homebuyers who have less than a 20 percent down payment when purchasing property. Lower credit scores may be subject to higher private mortgage insurance rates.
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What effects your credit score?
The Five Factors of Credit Scoring Credit scores are comprised of five factors. Points are awarded for each component, and a high score is most favorable. The factors are listed below in order of importance.
1. Payment History – 35% Impact Paying off debts on time has the greatest positive impact on your credit score. Late payments, judgments and charge-offs all have a negative impact. Delinquencies that have occurred in the last two years carry more weight than older items.
2. Outstanding Credit Card Balances – 30% Impact This factor marks the ratio between the amount owed and the remaining available credit. Ideally, the consumer should make an effort to keep balances as close to zero as possible, and definitely below 30 percent of the available credit limit.
3. Credit History – 15% Impact This portion of the credit score indicates the length of time since a particular credit line was established. A seasoned borrower will always be stronger in this area.
4. Type Of Credit – 10% Impact A mix of credit, such as an auto loan and a credit card, is more positive than a concentration of debt from only credit cards.
5. Inquiries – 10% Impact This percentage of the credit score quantifies the number of inquiries made on a consumer's credit within a twelve-month period. Each new credit inquiry can deduct points from a credit score. Note that personal credit inquiries do not impact scores.
***Please keep in mind this is only an example for illustration purposes. These interest rates may not be available and/or you may not qualify for this loan type.
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