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Impact of credit score on interest rate

Video transcript

Let's say that we're interested in buying a house that would cost $300,000. You go to a lender and they say, "Well as long as you put a down payment "for 25%, we'll be willing to lend you "75% of this money." So you go out, scrounge up your savings and then you put 25% down. 25% would be 1/4 of $300,000, so you have $75,000 down. $75,000 down payment. Down payment. And then you'll need to borrow the remaining, the remaining 75%. So 75%, which is going to amount to $225,000, you're going to borrow. What I want to do in this video, is think about how much you will pay in interest depending on what your credit score is. And this is only going to be a rough approximation. Interest rates change, bank policies change. But it'll give you a sense of what the impact of a credit score can be. So imagine you have a really great credit score. So let's think about this. Credit, credit score. Let's say that you have a really good credit score. Let's say it's approaching 800, let's say it's even, it's even right at 800. In that situation, at least at the time that I'm doing this video, interest rates will change, you could get a credit score, you could get an interest rate on a 30 year fixed loan, so that means you're gonna pay the same amount every month, and it's going to slowly pay down the principal and over 30 years you'll have paid off your house. The house will be all yours. So with a credit score of 800, so let me write this down, a 30 year, a 30 year fixed loan. You could get, for let's just say you could get it for Three point, I looked this up on some of these calculators here, 3.7 six five percent on a 30 year fixed loan. If you did that for $225,000, you're monthly payment, monthly payment, would come out to be a thousand and 44 dollars. Now let's think about what would happen if you had a not so great credit score, but still a score good enough to get a, to get a loan. So not great, but not a absolutely horrible credit score. So let's imagine a credit score that is in the, in the low 600's. So let's say you have a credit score of 630. 630. Based on the information that I found, a credit score of 630, you're gonna pay a dramatically higher interest rate. You're gonna pay, you're gonna pay above 5% in interest. And what I've looked up is 5.354 percent is what seems to be what the current information is, and once again, these will change over time depending on interest rate conditions and depending on how credit is perceived, et cetera, et cetera. And you might say, "Hey, you know, that doesn't look like "a huge difference. "That's not even a 2% difference." But it becomes very clear when you look at your monthly payment. The monthly payment when you're paying 5.354% is one thousand, one thousand 257 dollars. So you're paying, you're paying over $200 more per month. You're paying about 20% more per month, and if that doesn't kind of shock you, that, "Wow, you know, I could, I could, "I could lease a car for that amount." Just based on this, on this, it wouldn't be a fancy car, but you could, you could, you could do a lot with $200 a month. If that doesn't kind of hit you as a major, dramatic difference, you could think about the total interest paid over the life of the loan. Total interest. So obviously, or as we've talked about in other videos, as you start paying your loan, you're paying mostly interest, 'cause you have a large balance. And then as that balance, every payment, part of it is interest and then part of it is principal. As the principal pays down, more of your payment is, goes to principal and less of it goes to interest. But you're total interest, interest, over the life of the loan is pretty telling. Just based on this difference between credit. For this interest rate, on a 225 thousand dollar loan, you're total interest is going to be a little over $150,000. 150, 813. While with the lower credit score, with the lower credit score, you're total interest over the life of the loan, is going to be 227 thousand dollars 517. So you're gonna pay more, more than $70,000 more just because of this difference in your credit score. So hopefully this highlights the importance of really trying to make sure your credit score is as high as possible. Especially if you're going to undertake some type of major loan like a home mortgage.
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