How Does Bad Credit Affect How Much You Pay For A House?

by Travis Pizel · 18 comments

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?

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  • Anyone interested for applying a mortgage must know all the related info. Without proper inspection you may have a loss with your house. Thanks a lot Travis for elaborating the above. Those are looking for mortgage ideas can acquire a lot from it. Really informative!

  • Slinky says:

    Ack! It’s $400-$500 more a month! It wouldn’t have stopped us from buying since we bought under “what we could afford”, but I definitely have much better uses for a few hundred dollars a month in interest.

  • Slinky says:

    We payed a little bit for points up front to get the best rate when we bought. Since we have no intention of moving anytime soon, if ever, we should end up a few thousand ahead in the long run. We also have superb timing and managed to lock in a fixed rate mortgage at 3.25% right before rates started heading back up. I admit, I’m a bit smug about that every time I hear what the rates are now.

    • David Ning says:

      You did great!

      Can you imagine if instead of the 3.25% 30 year mortgage on the house you bought in 2012/2013, you purchased with a 6% 30 year mortgage in 2007?

      The different is life-changing!

    • Sounds like you made the right choice…especially if you’re planning on staying in the home for a long time. I’d be fine with never moving again, so we’re definitely thinking long term as well!

  • Catherine says:

    Hm this is interesting. Our term is up next year and im interested to know how everything is going to be affected. Looks like you’ll have to get hustling to make some money to pay your mortgage down faster 🙂

    • David Ning says:

      The beauty of the electronic system nowadays is you can send payments in at any time and the money will immediately count towards paying down your principal, helping you say so much more interest.

      And since it’s easy to schedule a payment, just keep shoving small amounts at it and you’ll pay off everything in no time!

  • Travis, 4.875% is still a very good rate for 30-year fixed. But knowing you could have saved $7k for having a slightly higher credit score can be upsetting. I haven’t done the math, but I think you could easily offset that amount by paying a little extra each month toward your principle to pay off your mortgage sooner.

    • Good point, Alex, and we do plan to pay extra each month to knock it out much sooner than the 30 year term. Of course, if we had gotten the lower interest rate, we could have still paid extra and saved even more. 🙂 Oh well, I’m not beating myself up over it, what’s done is done – this is more of a cautionary tale for those looking into getting a mortgage, or an auto loan for that matter. As always, thanks for your thoughts!

  • I remember, in my foolish youth (which lasted far too long), being completely indifferent to the kinds of comparative numbers you’ve shared. I didn’t care about the impact on our mortgage of a possible rise in interest rates – and I was oblivious to credit scores. What’s with that head-in-the-sand phenomenon? Now when I read your numbers, I’m amazed by the significance of even small increments in interest rates. We lucked in with a 2.99 mortgage rate three years ago, but we’ll have to renegotiate in another year – and I’m sure the rate will be higher. I’m so eager to attack our mortgage – but that won’t be until our mammoth business debt is paid off. As for your mortgage, I bet it won’t take you anywhere close to 30 years to pay it off.

    • David Ning says:

      You aren’t alone Prudence. Convenience is really costly in our society whether it’s not caring about rate differences or taking the time to ask for discounts!

      Good luck on finding a good deal in a year on your mortgage but you should start watching rates now so you can snatch a good deal if one comes up before the rates start fluctuating!

    • I find the Canadian mortgage system very interesting (I’m assuming you’re in Canada given your description of having to renegotiate in the next year). In years of declining interest rates it’s good for consumers, but in times of increasing interest rates….not so much. We have a similar thing in the US called an Adjustable rate mortgage (ARM) which is what we refinanced out of…and that readjusts every year. But you’re right….we’re hoping to have it paid off much faster!

  • David Ning says:

    Good reminder Travis. I remember my coworker telling us a few years ago of not qualifying for the lowest rate at the time but feeling comfortable with “just” a 0.25% increase. It was likely a $500k mortgage, so the amount lost was roughly $15k. I wish he knew!

    Plus, I bet he didn’t take the time to refinance last year when rates were like in the mid 3s, so he’s likely going to be out more like $100k.

    Yikes… $100k!!!

  • That’s crazy that such a small percentage has an impact like that, but thankfully you didn’t get hit with the half point increase as that really could start to get at some serious money. Our credit was fine when we got our mortgage, but now we’re in the no W-2 income trap.

    • David Ning says:

      You shouldn’t feel bad to be in the “no W-2 income trap”. You could very easily issue yourself W2s by filing some paperwork since you have income if for some reason you REALLY needed a W2.

      Of course, you’d then have to pay payroll taxes + payroll fees to get the paperwork involved.

    • It certainly could have been worse, John. We contemplated waiting a bit longer until our credit rating rose enough to get the best rate, but who knows how long that would take, or what interest rates would do in the meantime. We figured our best choice was simply to go with it. The no W-2 income trap certainly does make it a little harder to document your income, but it is doable….we just had to provide recent monthly invoices plus our tax returns from the last two years showing a history of miscellaneous income. Thanks for your comment!

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