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Lenders estimate your ability to pay back the money you borrowed based on your credit score. The risk factor they assume is built-in to your interest rate as a financing fee. Therefore, a low credit score results in a higher interest rate, higher monthly fees, and a higher amount of interest to be paid over the total life of the loan.
Referring to the statistics below, a borrower with a credit score of 620 would be questionable to an underwriter. While the lender may agree to provide financing, the increased interest rate is factored into the monthly payment. The statistics illustrate the difference in the amount of interest paid over the life of the same loan with three different credit score scenarios.
A borrower who increases his or her credit score from 620 to 720+ can potentially save $601 per month on mortgage payments, $7,214 per year, and approximately $216,432 over the life of the 30−year loan.
30 – Year Fixed Rate with a Principal Loan Amount of $250,000
Fico Score of 720 or greater equals an APR of 5.71%, a Monthly Payment of $1,453, and equates to $272,928 of Interest Paid.
Fico Score between 620 & 719 equals an APR of 5.76%-7.84%, a Monthly Payment of $1,466-$1,807, and equates to $277,845-$400,381 of Interest Paid.
Fico Score of 620 or less equals an APR of 8.45%-9.23%, a Monthly Payment of $1,914-$2,054, and equates to $438,957-$489,365 of Interest Paid.
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