When you're ready to finance your new home, you have more options than you probably…
Refinancing your home mortgage can certainly help your credit score. But there are important facts you should know before you start your hunt for a new mortgage.
Refinancing can save you money. Once you find a better interest rate and better terms, you will definitely improve your monthly budget. But what about your credit score? Will refinancing improve your credit score?
Small Hit, Big Potential
Rate shopping is not a bad thing but it can result in a slight ding to your credit score. FICO considers credit checks from mortgage lenders as a hard inquiry, one that takes a few points off your score. So multiple inquiries on your credit situation will temporarily affect your score.
But don’t worry; FICO says that it’s a small ding that will rebound quickly if you try to time credit inquiries to within 30-45 days. FICO treats all credit inquiries within that timeframe as one “credit pull,” and that minimizes the impact on your score.
You will also lose the loan payment history associated with your current loan. Payment history is a major factor in computing your credit score. When you refinance, you start a brand new payment history with your new lender. Some scoring models continue to factor in your payment history on closed loans, but it’s an important fact to consider when refinancing.
But don’t let these small dings prevent you from looking for a better mortgage. If you want to improve your credit score, the benefits of a better interest rate and loan term far outweigh those initial hits to your credit score.
Why You Should Take a Chance
The whole point of having good credit is to take advantage of its perks. The ability to get better loans, better insurance rates, and even a better job depends on a good credit score.
If you’re locked into a mortgage that you can no longer afford, the chances are good that your credit is going to suffer. If you want to improve or preserve your credit score, here are a few reasons to consider a refi:
- You want smaller monthly payments. If you’re locked into an adjustable rate mortgage, (ARM) you might want to refinance before the interest rates increase. Depending on the interest rate and your loan term, an increase in interest can mean more than a $100 per month increase. Refinance your mortgage now before that rate changes.
- You have excellent credit but a life change has affected your finances. If you lost your job or have experienced a divorce that’s affected your income, refinance now before your credit suffers.
- You want to change the terms of your loan. Maybe you need a longer loan term so that you’ll have smaller monthly mortgage payments. Improve your credit score by refinancing your loan now.
- You need to tap your home’s equity. If you’ve been in your home for any length of time, you may have built equity. Refinancing can allow you to access that equity and pay off other bills. Staying on top of your finances will help you keep your credit score healthy.
The Bottom Line
If you’re having trouble making your monthly mortgage payment, it’s in your best interest to investigate a new loan. It’s worth the ding to your credit score to find a better loan that fits your monthly budget. Refinancing your mortgage could substantially improve your credit score, as well as relieving much stress in your life.