What Does Bad Credit Really Cost Home Loans?

bad credit and home loans Maintaining good credit is essential today. Everyone is looking at credit scores now, including employers and insurance companies. However, credit scores have a significant effect on home loans. This effect can potentially cost a person hundreds of thousands of dollars.

The Effect of Good Credit for Home Loans

A credit score that is at or above the median credit score in the United States of 723 will gain you your pick of loans with favorable rates. Most people prefer to get a fixed rate mortgage because of its dependability. You can rely on your payments remaining the same for the life of the loan. People with good or excellent credit can obtain low fixed rate mortgages. Some of the lowest rates for good credit are between 4 to 5 percent.

The Effect of Bad Credit for Home Loans

Bad credit takes away the freedom of choice when it comes to mortgages. A person with bad credit can pretty much forget about acquiring a fixed rate mortgage with a low rate. More often than not, having a low credit score, one below 600, will often leave you with a sub-prime mortgage or an adjustable rate mortgage (ARM).

A credit score of 723 will gain you your pick of loans with favorable rates

In the case of an ARM, you may think you have lucked out because the initial rate will be lower, sometimes not much higher than fixed rate mortgages. However, this low rate does not last long. When it comes time for the rate to change, it will increase significantly, leaving the borrower struggling to keep up with the payments. The result of this will further damage your credit. Not to mention that ARMs were the culprit behind the sub-prime mortgage meltdown that sent the economy spiraling from 2008 to 2009.

What Bad Credit Really Costs Home Loans

A lot of people don't want to pay a higher rate for their mortgages. But what they don't pay attention to is the equation a low credit score creates for loan costs. Bad credit plus a high interest rate equals thousands of dollars lost. For instance, a credit score in the 760 to 850 range can get a $300,000 loan at a rate of 4.533 percent on a 30-year fixed mortgage, resulting in a monthly payment of $1,526 and total cost at the end of the term of $549,360. A person with a credit score between 620 to 639 for the same loan amount on a 30-year fixed mortgage will have a rate of 6.122 percent, and a monthly payment of $1,822 with a total cost at the end of the term of $655,920. Having a credit score in the lower 620 to 639 range will cost you $106,560 more than a person with good credit would pay.

The cost of bad credit for home loans is much greater than locking a low rate. The cost can literally result in hundreds of thousands dollars more that you will pay for your home. To minimize this cost, check your credit yearly. Develop a plan to pay down any outstanding debt and repair your credit by making timely payments and using credit wisely. When your credit score has increased to at least 700, you can lock in a better rate for a mortgage and save thousands.

ShawnTe Pierce