Mortgages are expensive enough. The last thing any of us want is to spend more on them than we need to. But if you haven’t taken the steps to make sure you’re getting the best rate on your mortgage, it could be costing you an extra $323 every month.
One of the biggest things that impacts your ability to get a good rate is your credit score. And it probably matters more than you think.
We recently ran the numbers and found that boosting your score from 620 to 760 could save you $323 per month on a $300,000 mortgage. It can also save the average person nearly $80 a month on auto payments, credit cards and more.
How to Make Sure You’re Not Wasting $323 a Month on Your Mortgage
Improving your credit score doesn’t have to be a complicated or lengthy process. You can do it quickly by using a credit-building tool, such as Instal by CreditStrong. With Instal, you’ll be issued a $1,000 secured loan, meaning the funds will be secured away and you won’t have access to them immediately. You can choose the length of your loan (either 24, 36 or 48 months) and the amount of money you’ll put away each month that works best for your budget (either $28, $38 or $48).
CreditStrong then reports these payments every month to the three major credit bureaus, which helps you build credit. Once you’ve paid off the full amount, the account is unlocked and you can withdraw the money. Your account will also be reported as paid in full with a $0 balance. Anyone can qualify for this — even if you have no credit at all.
Instal also comes with free monthly access to your FICO score, so you can closely monitor progress toward your credit score goals.
What Determines Your Credit Score?
If you’re interested in boosting your credit score, it’s a good idea to familiarize yourself with what goes into a credit score. The two main credit scores are the FICO score and VantageScore. Here’s how FICO scores break down, from best to worst:
- 800 or higher: exceptional
- 740-799: very good
- 670-739: good
- 580-669: fair
- 579 or lower: poor
The higher the score, the better your chances of being approved for a mortgage loan or other types of credit. Your chances of approval fall dramatically for scores below 670. If your score is 579 or lower, you’ll have a hard time getting approved for anything unless you put down a deposit or find a co-signer.
FICO has five factors that contribute to your credit score, each of which is weighted differently:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- New credit: 10%
- Credit mix: 10%
VantageScore 3.0 has six factors:
- Payment history: 40%
- Depth of credit: 21%
- Credit utilization: 20%
- Balances: 11%
- Recent credit: 5%
- Available credit: 3%
Credit Score Best Practices: Are You Doing These?
Because your credit score plays such a big role in securing a mortgage loan at the best terms, you should check it regularly — especially if you’re in the market to buy a new home. Not keeping an eye on your credit score means you won’t know when it goes down. You might not even realize your score is low until you apply for a mortgage.
If you’re in the market to buy a new home and aren’t doing these other things to improve your credit score, now’s a good time to start:
Pay Your Bills on Time
It’s impossible to overstate the importance of timely payments when it comes to your credit score.
“Making a late payment has a large immediate negative impact on your credit score,” said Erik Beguin, founder and CEO of Austin Capital Bank, which offers a family of credit-building products through its CreditStrong division.
Pay Credit Cards in Full
Running your credit card balances to their limit can destroy your credit score in a hurry. This is the case even if you pay your bills on time. The best way to avoid this problem is to only spend as much on your credit cards as you can afford to pay in a month. Paying your credit card bill in full each month can improve your credit score and help you avoid interest charges.
Limit Your Credit Applications
Whenever you apply for credit, the lender or card company runs a hard inquiry to determine whether it will approve you for a new account. Inquiries make up 10% of your credit score and each one has the potential to lower your score. Don’t apply for credit until you need a specific type of loan for a specific purpose, such as a mortgage or car loan.
Bottom Line
Your credit score has the potential to make a huge impact on your monthly expenses, especially your mortgage. If you’re in the market for a house, or you’re interested in improving your credit score, it’s worth considering Instal by CresitStrong.
It’s easy to get started and see how much you could improve your credit score.
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FAQs
Lenders call this the “front-end” ratio. In other words, if your monthly gross income is $10,000 or $120,000 annually, your mortgage payment should be $2,800 or less. Lenders usually require housing expenses plus long-term debt to less than or equal to 33% or 36% of monthly gross income.
What is the budget rule for mortgage payments? ›
To determine how much you can afford using this rule, multiply your monthly gross income by 28%. For example, if you make $10,000 every month, multiply $10,000 by 0.28 to get $2,800. Using these figures, your monthly mortgage payment should be no more than $2,800.
Is it worth it to pay extra on a mortgage? ›
Making extra mortgage payments can help reduce interest as well as the term of your loan.
Why did my mortgage go up $300 dollars? ›
A higher monthly mortgage payment doesn't necessarily mean you've done anything wrong. Mortgage payments can change even when the homeowner pays on time. Changes in your escrow account, property taxes, homeowners insurance or interest rate can increase the dollar amount of your mortgage loan payment.
What is the new federal law on mortgages? ›
Under a new rule from the Federal Housing Finance Agency (FHFA), which took effect on May 1st, borrowers with lower credit ratings and less money for a down payment will qualify for better mortgage rates, while those with higher ratings will pay increased fees.
What is Regulation Z in mortgage? ›
Created to protect people from predatory lending practices, Regulation Z, also known as the Truth in Lending Act, requires that lenders disclose borrowing costs, interest rates and fees upfront and in clear language so consumers can understand all the terms and make informed decisions.
What is the monthly mortgage payment rule? ›
According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance.
What is the 2 rule for mortgage payments? ›
The 2% rule states that you should aim for a 2% lower interest rate in order to ensure that the savings generated by your new loan will offset the cost refinancing, provided you've lived in your home for two years and plan to stay for at least two more.
What is the affordability rule? ›
The 28/36 rule dictates that you spend no more than 28 percent of your gross monthly income on housing costs and no more than 36 percent on all of your debt combined, including those housing costs.
What happens if I pay $1000 extra a month on my mortgage? ›
Throwing in an extra $500 or $1,000 every month won't necessarily help you pay off your mortgage more quickly. Unless you specify that the additional money you're paying is meant to be applied to your principal balance, the lender may use it to pay down interest for the next scheduled payment.
Ideally, you want your extra payments to go towards the principal amount. However, many lenders will apply the extra payments to any interest accrued since your last payment and then apply anything left over to the principal amount. Other times, lenders may apply extra funds to next month's payment.
What age should mortgage be paid off? ›
To O'Leary, debt is the enemy of any financial plan — even the so-called “good debt” of a mortgage. According to him, your best chance for long-term financial success lies in getting out from under your mortgage by age 45.
Why did my escrow go up in 2024? ›
If your home value has risen since the prior year, the cost of your taxes and insurance will also increase. Thus, the entity that holds your mortgage will hike up your escrow to ensure your monthly payment can cover those higher bills.
Does escrow go up every year? ›
Once a year, your lender reviews your escrow account to ensure that there's enough money to cover your taxes and insurance premiums. If this number changes, so will the amount you're required to pay. While it can be frustrating to be told to pay more, these numbers aren't up to your lender.
How do I know if my mortgage is too expensive? ›
The monthly income rule
“You want to make sure that your monthly mortgage is no more than 28% of your gross monthly income,” says Reyes. So if you bring home $5,000 per month (before taxes), your monthly mortgage payment should be no more than $1,400.
What is the new qualified mortgage rule? ›
The Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule) requires a creditor to make a reasonable, good faith determination of a consumer's ability to repay a residential mortgage loan according to its terms.
What is the 32% rule for mortgage? ›
The 32% rule
The 32% rule states that all of your household costs — your mortgage, homeowner's insurance, private mortgage insurance (if applicable), homeowners association fees, and property taxes — should not exceed 32% of your monthly income.
What is the golden rule of mortgage? ›
The 28% / 36% Rule
To use this calculation to figure out how much you can afford to spend, multiply your gross monthly income by 0.28. For example, if your gross monthly income is $8,000, you should spend no more than $2,240 on a monthly mortgage payment.
What is the 373 rule for mortgages? ›
Timing Requirements – The “3/7/3 Rule”
The initial Truth in Lending Statement must be delivered to the consumer within 3 business days of the receipt of the loan application by the lender. The TILA statement is presumed to be delivered to the consumer 3 business days after it is mailed.
