Do This One Thing to Help Pay Thousands Less on Your Mortgage

Image source: Getty Images

Who would have thought that one three-digit number would make a difference?

Important point

  • Working on your credit score before applying for a mortgage is critical to saving money on your home purchase.
  • The better your credit score, the lower the interest rate you qualify for.
  • You can raise your credit score by paying down debt, improving your payment habits, and removing errors from your credit report.

If you’re thinking about buying a home sooner rather than later, you may have a to-do list that includes things like finding the right real estate agent, narrowing down the neighborhoods you want. you see it, and even find out what is possible. mortgage. But there’s one big task you’ll want to add to your list: updating your screen credit score.

Personal finance guru Humphrey Yang recently revealed the importance of having good credit and being a reliable borrower. on Instagram by discussing two different mortgage applicants with different histories. The person who missed a payment on a loan was given a higher monthly payment (including interest) than the person who repaid a previous loan on time. This resulted in the borrower with strong credit paying $137,000 in less interest over the course of the mortgage! I don’t know about you, but $137,000 is a lot of money to me.

Let’s take a closer look and break this down into real numbers to see what a high credit score can do for you in your search for buy a house.

It is a story of two points

Let’s say you’re applying for a mortgage loan and you have a credit score of 620. This is the minimum score accepted to be approved for a standard loan (ie, one that is not backed by the government such as FHA or FHA. VA loan would be). The amount you’re borrowing is $350,000, and you’re getting a 30-year fixed-rate mortgage, the “world’s best mortgage,” according to Warren Buffett. With your 620 credit score, as of this writing and current mortgage rates, you would be looking at a monthly payment of $2,535, and paying a total of $562,538 in interest on your mortgage.

But what if you approach the process with a score of, say, 700? You will qualify for a low interest rate (because lenders will see you as a low-risk borrower), giving you a monthly payment of $2,211, leaving you paying $446,074 in interest — or $116,464 less than our original estimate.

How to improve your credit score

It’s easy to see from the numbers above how a higher credit score can be beneficial if you’re looking to invest in your home purchase. And, let’s face it, Home ownership is expensive just as it is. So what can you do to get your credit in top shape before you apply for a mortgage?

  • Pay down debt: Dig in and focus on it pay down your existing debts, especially if the interest rate is high, such as debt. This will free up some cash to save for your down payment and improve your debt to income ratio. approved for a mortgage.
  • Improve your payment habits: Your credit history makes up 35% of your credit score, so if you’ve been late on payments, now is a good time to improve by paying on time.
  • Check your credit report: Credit report errors are common, so it’s worth checking yours (you can find your Free credit report every week until the end of 2023) and see if there are any errors above. If you find something, you can ask to have it removed.

While you may hate the idea of ​​one more thing to do as you prepare to buy a home, improving your credit score should be a top priority. Having a better credit score will save you money on mortgage interest and make you a more attractive borrower to mortgage lenders. And doesn’t that work?

Leave a Comment