Interest Rates
Interest rates determine the amount of a monthly mortgage due which can sometimes be the difference of paying $1,000 more or less each month. For example, the monthly mortgage payment (principal & Interest) on a $400,000 loan with 30 year fixed interest rate of 5% is $2,147. However, the monthly mortgage payment for a $400,000 loan at 7% is $2,661, a difference of $514 a month.
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Points
- How consistently your bills have been paid on time
- How much debt is owed on your total available credit
- Types of debt: installment such as student loans, and revolving such as credit cards
- How long a person has had a credit history
- How many open credit accounts (the more accounts open, the lower the credit score will be)
- How many credit checks by lenders (the more checks, the lower the credit score will be)
A point is a loan fee equal to 1% of the loan. So 1 point on a $250,000 mortgage would be $2,500. Points are paid up front during the purchase of a home and can lower interest rates so generally if home will be kept for more than 5 years, it may be worth paying the points. Find the monthly cost difference between a mortgage with 0 points and a mortgage with 1 point, and then see how many years it will take to recover the amount paid in points. For example, the difference between a $1,500 monthly mortgage payment with 0 points and a $1,450 monthly mortgage payment with 1 point on a $200,000 loan is $50/month. Since 1 point will cost you $2,000, divide that by $50/month which would give you 40 months. So if you plan on living at the home for more than 3.5 years, then paying the extra point in this case is a good decision. Paying more than 1 point is not recommended because not only will it take longer to recover the cost, but the interest rate may not be much lower than paying just 1 point.
Credit ScoreCredit scores are extremely important. An individual's FICO score (Fair Isaac Corporation) determines whether or not lenders will lend you money and if so, how much and at what interest rate. A FICO score can be between 300 and 850, which generally 650 and above is considered good but the goal should be 720 or higher. A FICO score is typically determined by the following:
It is highly recommended that individuals get their credit checked once every 6 months to ensure their credit does not have any problems. Many people know someone who has been a victim of identity theft or had their credit stolen with fraudulent accounts. A free credit report without the credit score can be done from the 3 major credit reporting agencies. However, in order to get your credit score, you have to purchase a credit score.
Free trials and minimal fees of about $20 are available to obtain a credit report with scores from all 3 major credit reporting agencies (Equifax, TransUnion, Experian), which is well worth the cost to identify problems early on and have them corrected with the credit reporting agencies immediately. The longer a person waits to report a problem, the harder and longer it takes to have the issue resolved.
