After finding your dream home, the next thing would be making payments for the house. For many, this would mean taking out a mortgage loan. And with the house, possibly the biggest investment you’ll ever make, taking out a mortgage loan will no doubt affect your credit score. This consequently affects your financial status.
If you still don’t have a clear picture of the effects a mortgage loan has on your financial status, Altrua Financial has got you covered. Here’s an in-depth overview on the impact a mortgage loan will have on your financial position.
Fall In Your Credit Score
The credit score acts as an arithmetical figure meant to show your capability of paying back your outstanding debt. And immediately you take out a mortgage loan, your credit score takes a hit and gradually starts falling. This trend will continue until you can prove you’re able to meet your debt obligation by always making payments within the required timeframe as you had guaranteed.
This temporary fall in your credit score makes it harder for you to qualify for a loan. If you manage to get a loan, the terms aren’t as suitable: In these cases, you might be required to pay higher interest rates since you’re deemed a risky investment. Fortunately, if you consistently make your payments on time for around six months, you’ll be able to repair your credit score significantly.
The Mortgage Loan Diversifies Your Credit
Credit diversity also positively affects your credit score. This means taking out a mortgage loan, which is an installment loan in addition to the reusable or revolving credit such as credit cards, diversifies your credit. With this credit diversity, you’ll realize an improvement in your credit score, albeit not as significant as making your payments on time will.
Mortgage Loans Adds To Your Credit History
A mortgage loan is a long-term loan that you’ll typically be required to pay within 15 to 30 years. You should take advantage of this prolonged duration to improve your credit score by ensuring you make all your payments on time. And making timely payment is the most vital factor that affects your credit score, you should capitalize on this to better your credit history.
However, should you miss any one of your payments, you’ll notice a significant fall in your credit score. This makes it harder for you to get new credit. These late payment records will be visible on your credit report, with the effects of the recent late payments having a greater negative on your credit score. If you find yourself in a financial fix and can’t make the payments on time, it’s best to get in touch with your lender to discuss the options available.
A mortgage loan will undoubtedly have a significant impact on your credit score, which, in turn, affects your financial status. Because your credit score will be negatively affected right after taking out the mortgage, it’s advisable not to make any substantial purchases. However, if you always make your payments on time, you should realize an improvement in your credit score over time.