Answer: Tens of thousands of dollars when looking at long-term loans like mortgages.

Great chart recently released by myfico.com (hat tip Motley Fool) demonstrates how current interest rates on mortgages vary based on credit scores:

Here’s a quick mini-activity for students to see how much a low credit score could cost them:

• Using this simple mortgage calculator, plug in the following assumptions:
  • Home value: $234,000 (median sales price in September 2016)
  • Interest rate: 3.248% (high credit score rate)
  • Term: 30 year fixed
  • Monthly payment: ________________
• Now use these assumptions:
  • Home value: $234,000 (median sales price in September 2016)
  • Interest rate: 4.837% (low credit score rate)
  • Term: 30 year fixed
  • Monthly payment: ________________
• What is the difference between the two payments on monthly basis? Over the life of the 30 year loan?

Teaching note:

• Important for students to understand that if they can improve their credit scores, there may be an opportunity, in the future, to refinance their mortgage at a lower interest rate.
• Interesting that the interest rate gap between high and low credit scores is clustered around 1.5%-1.6% for the different loan types.

_____________

Check out this NGPF Lesson on Mortgages

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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