How Credit Repair Can Reduce Your Future Mortgage Payments

If you're getting ready to buy a home in the next few years, or sooner, your credit should be in the best shape possible. That's because your mortgage interest rate - and monthly payment - are based on your credit rating.

You'll get the best rates if you have a high credit score. And, as you probably know, a better rate in turn means you'll have a lower monthly mortgage payment. Unfortunately, borrowers with lower credit scores get higher rates, if they get approved at all. If your credit isn't in the best shape, repairing your credit now is imperative.

How Much Could You Save?

Consider a $200,000 30-year fixed rate mortgage. Based on today's national averages, a borrower with the highest credit score (between 760 and 850) would typically qualify for the best mortgage rate of 3.8 percent. The monthly payment at that rate would be $932 per month. By the time the mortgage is completely repaid in 30 years, that borrower will have paid a little more than $135,530 in interest.

Compare the same mortgage amount and term but with the rate given to a person with a low credit score of 620 to 640. The rate would be much higher, approximately 5.4 percent. As a result, the monthly mortgage payment would also be higher -- $1,122. In 30 years, the person with the lower credit score will pay $203,853 in interest, assuming they never refinance for a lower rate.

The person with the better credit score saves almost $200 per month on their mortgage payment and close to $70,000 in interest over the life of the loan. That money makes a big difference even bigger if you invest the interest savings. Investing $200 per month for 30 years at 5 percent return would give you $167,145 in 30 years.

While you may not be able to take your credit score from poor to excellent in just a few months, you may be able to raise it to the "good" range, say between 680 and 700. You won't qualify for the same rate as a borrower with an excellent credit score, but you'll still save a considerable amount of money. Consider the same mortgage and term, but with a higher credit score, you could get a 4.2 percent interest rate. That would result in a $978 monthly payment and $152,092 in total interest paid over the life of the mortgage. That's $144 less than what you'd pay at the lowest credit score. You'd save $51,761 over the life of the loan.

Tips to Repair Your Credit

Credit repair isn't a tough process, but it does take time. First, you have to figure out what's hurting your credit score. The only way to do this is to order a copy of your credit report. You can get a free one through AnnualCreditReport.com, a site set up to give you a government-granted free credit report.

Review your credit report for negative items like late payments, charge-offs, collection accounts, and bankruptcy. Anything that indicates a negative payment history drags your credit score down. If any of these items are inaccurate or older than seven years (or 10 for bankruptcy), ask the credit bureau to remove them.

If any accounts have delinquent balances, including charge-offs and collections, you'll have to pay these. Your mortgage lender will ask you to clear up outstanding balances before you can get approved, anyway. Paying these off sooner gives your credit score time to recover from the blow these delinquent balances have dealt.

The best way to improve your credit score is to add positive payment information. Starting now, make sure you pay everything on time. Don't miss another payment, even on a utility bill or library fine because even those can ultimately wind up on your credit report. If you don't have any tradelines in good standing, open a credit card or two so you can begin re-establishing your credit. Try to get at least 24 months of completely positive payments before you apply for the mortgage. Another important aspect of building a solid credit score is to make sure you don't use more than 30 percent of your totally allotted credit extension. Using any more than that can label you as a risk in the eyes of you creditor.

Check your credit score before you apply for the mortgage to see how much you've improved. Don't be afraid to give your credit score a few more months to increase, especially if it means you'll be saving money.

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Ed O'Brien is a seasoned writer in personal finance, specializing in credit repair. You can find more of his articles located at CreditRepair.org.