Quick credit check

Q: Consumers are told they need “excellent” credit to get the best mortgage rates. But what if you have average credit? How much extra do you pay?

A: Interest rates are always moving up and down, so it’s hard to get a specific answer. The general idea is that a high credit score produces several benefits.

1. It’s easier to get a loan.

2. Financing costs are lower.

3. Borrowers may be able to get larger loans.

Alternatively, a low credit score can mean big financial hurdles. Not only will borrowing costs be higher, but financing may also be unavailable. For example, in fiscal year 2019, borrowers with credit scores between 620 and 679 got more than half (53.18%) of the refinancing loans backed by the FHA. Those with scores of 579 and below got just 1.04% of the total.

“Average” credit is also a moving target.

According to Fair Isaac, developer of the FICObrand credit score, the average credit score reached a record 706 in September. The average has been moving up since the housing crash. The average in October 2009 was 686.

The difference in the two scores is just 20 points, but for a lot of lenders, that’s a big deal. The higher score can put borrowers in a better credit range with lower costs. Suddenly every point counts.

MyFICO.com has a “loan savings calculator” that shows credit score ranges and related interest rates. The chart changes to reflect interest rate movements. (See: https://www. myfico.com/crediteducation/calculators/ loan-savings-calculator/)

If we have a $150,000 mortgage, we can see how monthly costs vary using the MyFICO chart. In late February, the interest rate for someone with a credit score above 760 was 3.193%. The cost for principal and interest was $648. With a score between 620 and 639, the rate increased to 4.782%. The monthly cost was $785. That’s a difference of $137 a month, $1,644 a year, and $16,440 over a decade.

Higher credit scores mean lower borrowing costs. The difference between one credit band and another may seem small, but the numbers add up.

The higher cost associated with poor credit creates a long-term burden for mortgage borrowers. Unless they refinance when scores improve, borrowers with poor credit at the time of origination can be stuck with high rates for a long time.

Different lenders will have various credit bands. Maybe Lender Smith will see the top band as ranging from 760 to 850, while Lender Jones will want a score of at least 800 to get the best rates and terms.

It’s not just that mortgage rates are higher for those with weak credit; the costs for other forms of financing are also more expensive. Monthly bills for auto financing and personal loans are higher. Combine payments for various forms of debt, and suddenly debt-toincome (DTI) ratios can soar, a reality which by itself makes the risk of delinquency higher.

The bottom line is that it pays to have good credit, and it also pays to shop around for the best rates and terms. The cost of weak credit is real, but it’s also a cost borrowers can control by paying bills on time, avoiding debt, and saving.

Email your real estate questions for Mr. Miller to peter@ctwfeatures.com.