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Dec 16, 2022 Raising your credit score by just one point can save you thousands in mortgage interest

Gary Sandler

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Published 16 December 2022

According to a recent report from Fair Isaac Company, the average U.S. credit score is 716. In New Mexico, it’s 699. What many borrowers don’t realize is the extent to which just a few points — and sometimes even one point — can significantly alter their monthly payments and the amount of interest they pay over the life of their mortgage. That’s because mortgage rates are based on credit score tiers. The mortgage rate offered to a particular buyer is generally based on his or her credit ‘tier’ rather than exact FICO score.

The score itself is an indicator of risk. Some investors are risk-averse and prefer to purchase loans made to borrowers who have high credit scores. High scores are usually indicative of good money management and low risk to the lender, mortgage insurance company and creditors in general. Lenders reward their most creditworthy borrowers with low interest rates. The opposite is true for borrowers whose scores are low. To accommodate the difference in scores and corresponding risk factors, credit reporting agency Experian created five such tiers: Poor-350-579, Fair-580-669, Good-670-739, Very Good-740-799, and Exceptional-800-850. “Sixty-seven percent of Americans have a Good FICO score or better”, according to Experian’s website.

So, to what extent do credit scores affect the cost of money? In a word, bigly. According to the myFico loan cost calculator available to consumers at http://www.myfico.com/credit-education/calculators/loan-savings-calculator/, the monthly principal and interest payment on a 30-year, fixed-rate mortgage of $250,000 that was originated in New Mexico on December 15 ranges from a low of $1,421.00 to a high of $1,738.00. The difference in the amount of interest paid over the life of the loan also varies significantly. In our example, the total interest paid on the $250,000 loan made to a borrower with a score of between 760 and 850 would be $279,397 at 5.823 percent. Borrowers whose scores fall between 620 and 639 would pay $375,861 at 7.441 percent. By my fuzzy math, that 140-point difference reduces the monthly payment by $317.00 and saves the borrower $96,464 in interest charges over the 30-year life of the loan.

Whether purchasing a home or a vehicle, obtaining just about any type of insurance, or applying for credit or renting an apartment, it pays to know what’s in your credit files. A small error on a report can easily result in higher costs down the line. Checking files is free and easy to do. Everyone in the U.S. is entitled to a free annual look into their credit files at each of the three credit bureaus: Experian, Equifax and Transunion. Free access can be gained by logging on to www.annualcreditreport.com. The site is the only portal authorized by the U.S. government to allow free access to all three reports. Errors can be disputed online or by calling toll-free to 877-322-8228. Requests can also made by writing to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

Other websites, such as CreditKarma.com, MyFico.com and NerdWallet.com also provide free access to credit reports and tips on raising your credit score.

In the end, you are the on­­ly person on the planet who’s in charge of your credit scores. The new year is just two weeks away. If you haven’t checked your files recently, now may be a good time to do so. Get the point?

See you at closing.

Gary Sandler is a full-time Realtor and owner of Gary Sandler Inc., Realtors in Las Cruces. He loves to answer questions and can be reached at 575-642-2292 or Gary@GarySandler.com.

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