How Credit Impacts Your Payment or How to Lose $14K Without Thinking

In light of Justin’s post, I thought I’d provide an explanation on the cost of your credit standing. Let’s take an example of buying a $300,000 house and having two different mid FICO credit scores.  To provide this example, we will take imaginary characters Brad and George

• Brad has a FICO credit score of 702, not bad, but according to the rate table on myFICO.com, this means he will get an APR of 4.985% on a 30 year fixed mortgage.  Not bad right?
• George has a better FICO credit score of 792, not bad, but according to the rate table on myFICO.com, this means he will get an APR of 4.763% on a 30 year fixed mortgage. 

Now, let’s look at the payment differences?

• One pays $1,567/mth and the other will pay $1,608/mth for a difference of $41/month

Big deal right?  for the cost of a basic cable subscription, one is getting a slightly better deal.  But what’s the long term cost?

• $41/month = $492/year = $14,760 over 30 years. 

Now let’s assume we took that $41/mth and put it into a savings plan or invested it?  What would we have in 30 years?

• $21,950 at a 2.50% savings account interest rate
• $28,456 at a 4% compounded growth rate
• $41,185 at a 6% compounded growth rate

In a growing market, you might not want to miss out on the appreciation to save this kind of money, but in today’s housing market, you might want to consider getting your credit score in tip top shape before you close the deal.  It could mean mucho savings over the 30 year life of your loan.

March 3, 2009