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Publication #FCS7234

YOU and YOUR CREDIT: Home Ownership and Credit1

Michael S. Gutter, Joan P. Elmore, and Travis P. Mountain2

Using credit wisely helps you to achieve many of your goals; in fact, all of us need it to obtain a home as well as other important purchases.

Having a mortgage affects two aspects of your financial management: your net wealth and your cash flow. The home will count as something that you own (asset) and the mortgage as something that is owed (liability).

As you pay down your mortgage, this will improve your net wealth. As your home increases in value, you also will improve your net wealth.

However, the mortgage payment will be a major expense. It is critical to look at your budget prior to taking on a mortgage to gauge exactly how much you can truly afford.

It is important to know your FICO score prior to meeting with lenders (Note your FICO score is your credit score, which is based on your payment history, debt capacity, length of history, number of inquiries, and types of credit being used). It can also be helpful in determining the price of home you can afford since it affects how much you can borrow.

Table 1 helps to illustrate the difference in the monthly mortgage payment for a 10-year home equity loan of $100,000 broken down by FICO score. Thus, a higher score would mean a lower interest rate; hence, you would have a lower payment or could afford to borrow more.

Table 1. 

Estimated monthly payment on $100,000 mortgage by credit score and corresponding interest rate (assuming a 10-year loan period term).

Credit score

Interest rate1

Monthly payment

760-850

6.421%

$1,131

700-759

6.716%

$1,147

660-699

7.208%

$1,172

620-659

7.970%

$1,212

580-619

9.446%

$1,291

500-579

10.676%

$1,359

1Rates as of March 8, 2012 from myFICO.com

One last issue that often arises with home ownership is the desire to fill every room in the home with furnishings. This tends to be another popular use of credit when purchasing a home. It is critical to avoid this trap. Taking on too much consumer debt too soon can leave you unprepared for the unforeseen expenses that tend to come up when buying a home.

For More Information

Below are links to each publication in the YOU and YOUR CREDIT series.

Credit Dos and Don'ts: http://edis.ifas.ufl.edu/fy1064

Credit Card Basics: http://edis.ifas.ufl.edu/fy1065

Managing Your Credit: http://edis.ifas.ufl.edu/fy1066

Credit Reports: http://edis.ifas.ufl.edu/fy1067

Credit Scores: http://edis.ifas.ufl.edu/fy1068

Home Ownership and Credit: http://edis.ifas.ufl.edu/fy1069

Further Resources: http://edis.ifas.ufl.edu/fy1070

Series of Seven Parts, Bound as Single Document: PDF version - http://edis.ifas.ufl.edu/pdffiles/FY/FY107100.pdf

Footnotes

1.

This document is FCS7234, one of a series of the Department of Family, Youth, and Community Sciences, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida. Original publication date September 2008. Revised April 2012. Visit the EDIS website at http://edis.ifas.ufl.edu.

2.

Michael S. Gutter, financial management state specialist and assistant professor, Department of Family, Youth, and Community Sciences; Joan P. Elmore, Extension agent IV, Jackson County Extension, Marianna, FL; and Travis P. Mountain, former lecturer, Department of Family, Youth, and Community Sciences; Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida, Gainesville, FL 32611.


The Institute of Food and Agricultural Sciences (IFAS) is an Equal Opportunity Institution authorized to provide research, educational information and other services only to individuals and institutions that function with non-discrimination with respect to race, creed, color, religion, age, disability, sex, sexual orientation, marital status, national origin, political opinions or affiliations. For more information on obtaining other UF/IFAS Extension publications, contact your county's UF/IFAS Extension office.

U.S. Department of Agriculture, UF/IFAS Extension Service, University of Florida, IFAS, Florida A & M University Cooperative Extension Program, and Boards of County Commissioners Cooperating. Nick T. Place, dean for UF/IFAS Extension.