Low Credit Scores Add Up

A “fair” credit score between 640 and 679 could cost a borrower around $720 a year in extra mortgage payments than a borrower with an “excellent” score, according to a new Zillow study.

Zillow analyzed Annual Percentage Rate (APR) terms offered to borrowers on Zillow Mortgages and found that “a borrower with a fair score will pay 7 percent more over the life of a 30-year mortgage for the same home as an otherwise identical borrower with a credit score above 760.” To put that in clearer numbers, that 7 percent would add up to nearly an extra $21,000 during the life of that mortgage. Or, as Zillow puts it to provide context, “roughly equal to one year’s tuition costs for an out-of-state student at a public university, or the cost of a new car.”

Breaking things down further, Zillow posited a hypothetical “ buyer with an excellent credit score in Los Angeles earning the area’s median income and purchasing the typical L.A. home.” That buyer could likely expect to be offered an average APR of 4.50 percent. With a standard 20 percent down payment, that borrower would pay around $31,000 a year on a $645,000 home, eventually totaling $942,000.

Were that borrower’s credit score to be 80 points lower, firmly in “fair” territory, and received a commensurate APR of 5.12 percent, it would cost the borrower an extra $2,300 per year—or nearly $70,000 more over the life of the loan.

“Under these same assumptions, the total additional costs over the life of a 30-year loan on a typical local home for those with fair credit compared to excellent credit range from $129,000 in San Jose to around $9,000 in Pittsburgh among the larger metros,” stated the Zillow report.

To read Zillow’s full report on the impact of low credit scores, including full details of their study’s methodology, click here.