Understand your credit score to score the best mortgage

There is a raging debate today among financial pundits on the importance of or the risks associated with taking on financial debt. Best selling authors, Donald Trump and Robert Kiyosaki, both extol the virtues of taking on large amounts of debt, especially if it is to be used to finance real estate purchases. However, the one area in which there are no disputes is that every consumer should do everything that they possibly can to maximize their own personal credit score and to reduce their own personal cost of borrowing money.

Your credit score has become an increasingly important determinant of your personal cost of capital. The lower the cost of capital, the more debt you can take in and the easier it will be for you to service the debt both today and into the future. A higher cost of borrowing will put increasingly financial pressures on your family as you carry the burden of higher monthly payments and interest expense.

When seeking a new mortgage, your credit score is a primary determinant of your interest rate. Mortgage companies rely on your credit score, which is a mathematical model that assesses the information within your credit report and returns a quantitative measure that represents your relative likelihood to that you will be able to pay back your outstanding debt.

There are three primary credit reporting bureaus in the United States: Experian, TransUnion and Equifax, each which maintain a detailed credit report on each consumer. You are able to receive one free credit report each year from each of the bureaus but you will incur a minor cost to receive your personalized credit score. This small investment is well worth it to give you a view into what the mortgage companies will be seeing when they evaluate your credit.

So important is your credit score to your eventual mortgage rate? Well, accordingly to Fair Issac, which is the company that produces the FICO score most commonly used in the mortgage industry, a credit score in the range of 700-759 (850 is the highest possible score) and 620-659, could represent a full percentage point difference in your mortgage. While that does not seem like much, on a $250,000 mortgage fixed over 30 years, the difference between a 6.5% mortgage and a 7.5% mortgage is $60,000 in additional interest over the life of the loan and a monthly mortgage payment of $170 more with the higher interest loan. This is money that you could use to more quickly pay down your mortgage or increase your personal savings.

With such a large difference in your borrowing costs dependent on your credit and credit score, it is well worth your time to know exactly where you stand today and to develop a plan to reach your target credit level in time for you to purchase the house or car that you want.