Your FICO score plays a significant role in determining the cost of credit in a mortgage. Here’s how it works:
✔ Interest Rate: Lenders use your FICO score to assess your creditworthiness. A higher FICO score usually indicates that you’re a lower risk to lenders, which can lead to a lower interest rate on your mortgage. Conversely, a lower FICO score suggests higher risk, leading to higher interest rates.
✔ Mortgage Insurance: You may be required to pay private mortgage insurance (PMI) if you’re taking out a conventional loan with a down payment of less than 20%. PMI adds to the overall cost of your mortgage.
Let’s consider two borrowers, both looking to purchase a $400,000 home. One borrower will pay considerably more for the same house because of his FICO score. Let’s take a closer look.
Applicant #1 has a 675 FICO and Applicant #2 has a 790 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 675 FICO borrower vs. a 790 FICO borrower.
Based on today’s (Sept 3rd) rates for a conventional 30 year fixed rate mortgage:
675 FICO = 7.125% — P&I monthly payment = $2,425.00
790 FICO = 6.375% — P&I monthly payment = $2,246.00
👆 That’s a $179/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 675 FICO borrower will pay almost $65,000 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.
675 FICO = $192 per month.
790 FICO = $51 per month.
Total P&I + PMI (Principal, interest, and private mortgage insurance):
675 FICO = $2617.00 per month.
790 FICO = $2297.00 per month.
👆 That’s a $320/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.
