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Cost of Credit Scores

Average mortgage rates based on credit scores

January 10, 2006


photo of Coco Salazar

It takes as little as a one point difference in a credit score to almost double the interest charges a borrower pays over the life of a mortgage loan.

A borrower with a top-tier FICO score -- one between 720 and 850, can expect to receive a 6.243% interest rate on a $250,000, 30-year fixed-rate mortgage, according to myFico.com. The total interest paid over the life of the loan would amount to $303,736.

But if a score falls into the range of 675 to 699, the borrower might receive a rate of 6.905%, resulting in $31,970 more interest paid than if the credit score was at least 700, the site of the Fair Isaac division indicates.

The gap is of interest paid is largest when the FICO falls into the 620 to 674 tier, as an 8.055% interest rate over the life of the 30-year loan would amount to $413,842 -- a whopping $70,801 more in interest than it would cost the middle-score borrower with a FICO of at least 675.

When the borrower's FICO falls into the 500 to 559 tier, a 9.289% interest rate results in a $2,064 monthly payment with $492,953 interest paid over the life of the loan, which is about $49,000 more in interest than for borrower with a 560 FICO and a difference of $189,217 from the borrower with excellent credit, according to the site.

A first step loan prospects should do at least three months prior to applying for a mortgage is obtain a credit report from the three national credit reporting agencies, Equifax, TransUnion and Experian, to ensure their credit files are accurate, the National Mortgage Brokers Association recently said. Any inaccuracies and outdated information in the credit file should be modified by sending to the specific agency a written dispute and supportive documentation to request the item be reinvestigated and verified as to its accuracy.

Mortgage hunters can reportedly improve their scores by paying down and keeping all credit card balances below 30% of the credit limit, having a low balance on several accounts versus a high balance on one or two cards, avoiding to close accounts or consolidating credit, and keeping accounts active by using them at least once every 5 months.

Prospective borrowers are also advised to keep the number of credit inquiries at a minimum and avoid late or collection accounts -- a collection account balance doesn't disappear from the file for seven years after the occurrence regardless of when it was paid in full, NAMB said.

Coco Salazar is an assistant editor and staff writer for MortgageDaily.com.

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