Mortgage borrowers can gain big savings by taking this one crucial step before buying a home, according to Zillow. (iStock)
While mortgage savings may be harder to come by in a high interest rate environment, one move that borrowers can make to potentially lower their monthly mortgage payments is to improve their credit scores.
A recent Zillow analysis said that borrowers with an "excellent" credit score — between 760 and 850 — could be saving up to $103,626 in mortgage interest payments over the life of a 30-year fixed-rate loan, based on the current price of a typical home, $354,165. Buyers with "fair" credit scores — between 580 and 669 — may be paying up to $288 more on their monthly mortgage payment than those with "excellent" credit.
"When you are thinking about buying a home, the best first step you can take is to fully understand your financial picture, what you can afford, and your outstanding debts or obligations," Libby Cooper, Zillow Home Loans vice president, said.
She added that some steps borrowers with low credit could take to improve their scores include disputing possible report errors and paying down as much debt as possible. This could increase the home loan a borrower qualifies for and potentially help them save hundreds in monthly mortgage payments.
Equifax sent wrong credit scores to lenders
The Zillow analysis shed light on how costly reporting errors made by one of the big three credit bureaus could be for borrowers. Equifax recently disclosed that it had sent wrong credit scores to lenders, potentially affecting borrowers' interest rates or even resulting in their loan applications being denied.
Equifax said that as many as 300,000 people experienced a score shift of 25 points or more, enough to swing a borrower's credit rating from good to fair or fair to poor. However, lenders typically pull scores from all three credit bureaus when underwriting a mortgage,
Fannie Mae and Freddie Mac are likely to have purchased only a small amount of loans impacted by wrong credit scoring, according to the Wall Street Journal. Mortgage lenders that may have purchased loans scored at a higher rate before the mistake was disclosed would owe the government-sponsored entities (GSEs) money. The GSEs would, conversely, have to reimburse lenders for fees charges on loans underwritten to lower scores.
If you are interested in taking advantage of the current mortgage rates, you could consider refinancing your loan to lower your monthly payment. Visit Credible to find your personalized interest rate without affecting your credit score.
High interest rates could mean borrowers are locked in longer
The current high interest rate environment only exacerbates the situation for low credit score borrowers since it leaves little room for them to refinance out of higher rates, even as their credit scores improve, Zillow said. It potentially leaves many borrowers stuck for a longer prior of time with the high cost of having low credit.
Homebuyers nationwide are also dealing with record-high home prices, adding to the affordability issues. Home prices grew by 15.8% annually in July, according to CoreLogic. Meanwhile, borrowing rates have roughly doubled since last year, when rates were below 3%, according to Freddie Mac data. Mortgage rates have fluctuated this year but currently hover around 6%.
One bright spot to higher home prices is that Americans have built up a record amount of equity in their homes. Nearly half of all mortgage payers are equity-rich, according to data reported by ATTOM, a real estate data curator.
Rick Sharga, the executive vice president of market intelligence at ATTOM, said that following continued home price appreciation, "it's no surprise that the percentage of equity-rich homes is the highest we've ever seen and that the percentage of seriously underwater loans is the lowest."
Sharga noted that even as home price appreciation begins to slow, it is likely that homeowners will continue to build on the record amount of equity they have for the rest of 2022.
If you want to take advantage of rising home prices, you could consider taking out a cash-out refinance to help you pay down debt or fund home improvement projects. Visit Credible to find your personalized interest rate without affecting your credit score.
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