No one actually wants a mortgage. A mortgage is simply a means to an end, if you don’t have the cash. Ridding yourself of the financial obligation is the next best thing, but could it come at the expense of your credit score? What to know…
Mortgage Affects On Credit Score
Nothing can help or hurt your credit scores as much a home mortgage. Home mortgage loans are reported on a monthly basis to all three credit bureaus. Put simply, a mortgage can radically increase your credit rating as you make consistent loan payments. Consider this… if you own your home free and or rent one, you do not receive this credit rating benefit. If you have never had a mortgage before or have not had one in recent years, a score increase of 30 to 40 points in as little as a few months is not uncommon. When you pay your mortgage off in full, the loan servicer reports the balance paid in full, ceasing the ongoing credit benefits. Paying off your mortgage in full does not directly hurt your credit score so long as the rest of your credit is paid as agreed in a timely fashion.
Credit Picture Plays A Role
If you pay off your mortgage, and you have derogatory items (lates, collections, closed accounts etc.) these credit account will continue to report well into the future possibly hurting the score down the road. Without the power of a mortgage rating, the other credit accounts take over as the main credit framework. If possible, pay off the mortgage when you’ve done everything else you can for maintaining healthy credit score, so when the mortgage is ultimately paid off your credit score does not follow suit by dropping a couple of points.
Term Shortening
Moving from say a 30 year mortgage to a 25 year mortgage or a 20 year mortgage has no bearing on your credit score in your mission to ultimately become mortgage free. Unlike a home-equity line of credit which acts as a giant credit card tied to your home, a traditional mortgage loan on an amortization schedule reports favorably in terms of supporting a good credit score. An equity line of credit may hurt your score when carrying a balance in excess of 30% of the total allowable credit limit.
Does Loan Type Hurt My Credit Score?
No. A conventional loan, VA loan, an FHA loan, a USDA loan, it does not matter, all of these available loan programs all report the same way to the credit bureaus. There is an exception if you have a loan modification in your past, your servicer is going to report ‘restructured mortgage‘ and this can hurt your credit score as well as making you less creditworthy for new mortgages in the future. Additionally, if you’ve had a previous mortgage to your name that was short sold for a property in the past that will report settled less for than full balance which may also strain your score.
If you are prepaying your mortgage in an attempt to pay it off sooner while saving interest, continue to do so especially if you have 10+ years or longer are left on the duration of your mortgage term. Even if you have credit that needs remediation, ten years is plenty of time to get your other credit obligations in order. If you know you can pay off your mortgage sooner by prepaying or refinancing or even combination of the two, don’t worry about the risk of paying off your mortgage pegged to your credit score.
Not One Size Fits All Approach
Know the big four credit calamities:
- Foreclosure
- Short Sale
- Deed In Lieu
- Bankruptcy
All these events if applicable remain on your credit report and wane your credit score in order of most recent. The longer the time lapse from the date the event occurred, the more that particular event has to reduce your coveted credit score.If you have a mortgage and rest of your credit history is in peril, remember maintaining a mortgage with consistent payments will help support and offset bad credit factors (lates, collections, judgments, liens, charge offs). If you don’t need a high credit score, or the ability to procure credit for favorable terms is less attractive then becoming mortgage free, then by all means pay the mortgage off in full if you have the ability to do so. If the rest of your credit is otherwise intact and your credit score is good, expect little to no change to your credit ridding yourself of the biggest liability of your life.
Want know your credit score when you apply for a mortgage? Begin with a free mortgage quote online now!
