A few months ago, my wife and I refinanced our mortgage. During the process, our bank informed us that our interest rate would be increased by an eighth of a percentage point, because my credit score was just under the 710 required for their best rate.
It’s well known that people with less than sparkling credit pay higher mortgage interest rates because they’re considered higher risk — but did you ever wonder how a higher interest rate translates into real dollars?
How much did that eighth of a percentage point really cost us?
Our new mortgage was for $264,500 at an interest rate of 4.875%. Plugging those numbers into an amortization calculator, I figured out we’d pay $239,412.07 in interest over the 30-year term. Had my credit rating been just a few points higher, our interest rate would’ve been 4.75%, and our total interest paid would’ve been reduced to $232,212.59.
My slightly under par credit score cost us $7,199.48.
Here are some additional values based upon our mortgage value:
Interest rate Total interest paid Difference
4.75% $232.212.59 n/a
4.875% $239,412.07 $7,199.48
5.00% $246,661.55 $14,448.65
5.25% $261,308.37 $29,095.78
With just a half point increase in the interest rate, I’d pay almost $30,000 more for my home!
There are so many things to consider when applying for a mortgage. Your credit score, and how it affects the total price of your home, has to be on the list. If your credit score causes your interest rate to take too big of a hit, you might want to improve it before taking the mortgage plunge.
The total dollars paid based upon your interest rate should always be a consideration — even if your credit score exceeds what’s needed for the best interest rate. The current financial market seems to indicate that mortgage rates are on the rise. While the monthly payment may not seem significant, an exercise like this can demonstrate how a seemingly small increase in the interest rate can cost you tens of thousands of real dollars over the term of your mortgage.
Have you applied for a mortgage with less than perfect credit? How much did it cost you in real dollars over the term of your loan?