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Posted by Mortgage Diary in About Mortgage, Featured Articles, Mortgage Payment on Apr 7th, 2009 | 2 responsesMany consumers are aware of the relationship between the credit score and the chances of being approved for a home loan or a mortgage but do you really know how the credit score is used to calculate the terms of the mortgage? Chances are that you don’t but being an informed consumer can save you thousands of dollars when it comes to financing fees.
How do credit reporting agencies calculate the FICO score, or the credit score? The credit score is calculated using specific formulas that take into account how long you have been using credit and the history that has been established through this time. The score takes advantage of the types of credit that are used and the payment history of the obligations. It is important to ensure that all payments are made on time throughout the month to facilitate a good score, as this establishes a positive history with the credit reporting agency. Any negative entries on the credit file can decrease the score, these include: any accounts that have been filed with collection reports and any information that demonstrates that payments have been late or missed with a specific company – and even the dreaded bankruptcy, which can negatively affect the credit score for up to ten years.
Here is everything that the consumer should know when it comes to the credit score and how it can increase or decrease your mortgage payment every month:
Your credit score determines the interest rate that will be charged to the home loan. The interest rates that are offered to consumers is often lower for those with a high credit rating and higher for those with a lower credit rating. Those with a lower rating can sometimes not even qualify at all for a home loan and therefore must increase the credit rating or find alternative options to finance the purchase of a home.
The interest rate that is used to calculate the cost of borrowing the money will obviously increase with bad credit – but does this really affect your monthly payments? Did you know that the difference of two to three percent in interest could mean the difference of thousands of dollars being charged to the home loan? Therefore, keeping a high credit score is going to save you money on the home loan and allow you to develop equity quicker whereas a higher interest rate that is often associated with a lower credit score can cost you money each month.
The first few years of a mortgage repay the interest that is being charged to the home loan – which can make it difficult to build equity within the home loan throughout this period. If the interest rate on your loan is lower it can decrease this period and allow the homeowner to begin taking advantage of the equity in the home quicker.
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