Your FICO score, or credit score, plays a significant role in determining your cost of credit. Lenders use your FICO score to assess your creditworthiness. A higher score indicates lower risk, so borrowers with higher scores typically qualify for loans with lower interest rates. Conversely, those with lower scores may receive loans with higher interest rates, which can result in paying more over the life of the loan. Thinking about buying a new home? When applying for a mortgage loan, your credit score is a crucial metric.
Let’s take a look at a real world example of two different mortgage loan applicants — Applicant #1 has a 685 FICO and Applicant #2 has a 785 FICO. Each borrower has a 10% down payment.
Assuming a $400,000 purchase price with 10% down and a $360,000 loan (90% LTV), here is the “cost of credit” for a 685 FICO borrower vs. a 785 FICO borrower.
Based on yesterday’s (Sept 19th) rates for a conventional 30 year fixed rate mortgage:
685 FICO = 7.99% — P&I monthly payment = $2,639.00
785 FICO = 7.375% — P&I monthly payment = $2,486.00
👆 That’s a $153/mo difference straight away.
What does that look like over the life of the loan? Let’s break it down.
As you can see above, the 685 FICO borrower will pay almost $55,000 MORE in total interest over the life of their mortgage loan!
But wait…there’s more! Because this loan is greater than 80% LTV (loan-to-value), PMI is required. Private Mortgage Insurance (PMI) is typically required if your down payment is less than 20% of the home’s purchase price. Once you’ve paid down your loan balance to the point where you have at least 20% equity in the home, you can request to have the PMI removed.
Your monthly PMI premium is heavily influenced by your FICO score. Let’s look at the mortgage insurance premiums for each borrower.
685 FICO = $186 per month.
785 FICO = $60 per month.
Total P&I + PMI (Principal, interest and mortgage insurance):
685 FICO = $2825.00 per month.
785 FICO = $2546.00 per month.
👆 That’s a $279/mo difference due to one factor: YOUR CREDIT SCORE
In summary, your FICO score directly impacts the cost of credit and financial opportunities available to you. Maintaining a good credit score through responsible financial management can save you money and open doors to more favorable credit terms. In the market for a new home? The best way to get a snapshot of YOUR creditworthiness is to get a mortgage pre-approval early on so you can make adjustments if necessary.
As always, please feel free to reach out with questions.
