Buying a Home
Buying a home is a major milestone in most peoples' lives. You finally get to paint the rooms a color you can live with, and you can benefit if the home increases in value. Whether you live comfortably or in cramped quarters depends on your credit. As with an auto loan, your lenders can figure out the maximum they'll give you based on your credit.
Imagine that you are making the biggest purchase of your life. You're talking with a mortgage lender, who is working on getting you the best rate possible. After going through your credit, it turns out that you have a credit score of 650. Next, imagine that you are hoping to borrow $250,000 for your new home, and you want to use a 30-year fixed mortgage. Based on these numbers, the mortgage lender would come back to you with the following loan:
Your mortgage's APR would be 8.376 percent
Your monthly mortgage payment would be $1,900
The total interest you would pay over the life of the loan is $434,129
Once again, consider a 100-point improvement in your credit score. Your dream home will get even better! If you have a score of 750, your loan improves:
Your mortgage's APR would be 6.564 percent
Your monthly mortgage payment would be $1,591
The total interest you would pay over the life of the loan is $322,655
Now you're getting into some serious numbers. An extra $400 per month could come in handy. On a similar 15-year mortgage, you would save about $100 per month. Again, this is money you could put to better use elsewhere.
If your credit score is too low, you might not have the full range of loan options available to you. Below 620 or so, lenders might decide that they are unwilling to give you certain types of loans, 15-year fixed-rate mortgages and 7/1 ARMs, for example.
You'll also find that having good credit gives you more options. For example, your ratios might not have allowed you to get into a loan with a $1,900 monthly payment. Depending on your income and your other monthly payments, the lender might determine that you're taking on too much debt. In that case, your credit would have priced you out of the market. You would have to settle for a smaller loan, which means you may not get the house you really want. You can also look at this from the opposite direction: if you can afford the $1,900 payment with a credit score of 650, then you can afford an even bigger loan with a credit score of 750. Having good credit means you have more flexibility.
