Is refinancing a mortgage bad for your credit? – Councilor Forbes
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Refinancing a mortgage is when you get a new loan to replace your current home loan. Depending on the type of loan you get, refinancing can help you lower your interest rate or monthly payments, or shorten your repayment terms to pay off your loan faster.
When current mortgage and refinance rates are lower than what you are paying on your existing mortgage, you may want to get started on refinancing your home as soon as possible. But refinancing a mortgage can lead to credit losses and may require additional upfront costs. Here’s what refinancing means for your credit report and your score.
How refinancing your mortgage affects your credit
Every time you complete a credit application, your credit score will take a temporary hit. The decrease comes from the credit investigation, the length of the credit history and the new amount of debt.
When you submit a credit application – for a refinanced credit card or home loan – the lender will perform a thorough credit check, which temporarily lowers your credit score. Serious credit inquiries represent 10% of your credit score.
Usually, filling out many requests of the same type within a few weeks of each other indicates to the credit bureaus that you are making rate purchases. But if you complete a few requests a few months apart, those might be considered separate requests. Each request causes a temporary dip.
The average age of your credit history matters
A refinanced home loan can show up on your credit report as a new loan, which means it lowers the average age of your credit history. The age of your credit history is 15% of your total score. While adding new credit and making timely payments is good for your long-term score, a shorter credit history tells potential creditors and lenders that you don’t have much experience managing credit. . While this is not a major factor, it does impact your total score.
Your first loan is paid off by your refinanced loan, so the first loan will be closed. Closing a loan changes the amounts you owe (or the use of credit) and also lowers the average age of your credit history.
How to prevent damage to your credit score
Refinancing a home loan means you need to keep your credit profile in top shape while you prepare for the last credit application and get the lowest interest rate available.
Prequalify before applying
Before completing a refinancing application, prequalify yourself. Prequalification is a convenient way to see what refinancing terms you can qualify for. Lenders will usually perform a gentle credit check, which has no negative impact on your credit score, to figure out what terms are available to you. This will allow you to see your loan terms and choose the best lender before submitting a full application that will require a serious credit check, reducing the number of serious credit checks that will be done against your credit.
Don’t miss payments
Payment history represents 35% of your total FICO score, and even a late or missed payment can lower your credit score. Continue to make on-time payments on your loan until you are approved and your new lender gives you a new date to start making payments on your refinanced loan. This will help you avoid missing payments during the transition.
Don’t open more loans too early
The more applications you complete, the more difficult questions you will see on your credit report. And that’s not limited to refinanced home loans. If you apply for a credit card, car loan, or even a personal loan in the weeks leading up to refinancing, your credit score will likely drop.
If you want to complete a few applications with many different lenders, be sure to do so within a few weeks of your first completed application. This way, the firm request only counts as one request, not as one request for each request that you complete.
How to prepare for refinancing your home
Before refinancing your mortgage, prepare your money and your credit to better protect your financial profile with lenders. Here are a few tips.
- Check your credit history. You can check your credit report with each of the major credit bureaus (Equifax, Experian, and Transunion) through AnnualCreditReport.com. During the Covid-19 pandemic, you can check your credit report every week until April 20, 2021. Also check your credit score for free through your bank or credit card issuer.
- Clean up all errors. Use the time to remove any errors on your credit report. It is possible that your credit report contains false or derogatory ratings, which keeps your score lower than it should be. Contact credit bureaus with bad scores to dispute them.
- Be pre-qualified. Browse through many different lenders to see the best potential deals possible. The more lenders you can compare, the better your idea of your new terms will be.
- Put your papers in order. Since your last mortgage application, your finances may have changed. Prepare your tax forms and any other financial documents before completing your application.
- Fill out a request. Once you have chosen a lender with the best interest rate and the best repayment terms, complete your refinance request. Since you will have your papers ready, the refinancing should go faster. Your lender may have questions or follow-up requests, such as proof of employment or income, so be sure to respond to them as soon as possible.
- Continue to pay your current loan. Unless otherwise specified, pay off your old loan until your new refinance lender tells you the process is complete. This ensures that you won’t miss any payments, which will lead to a drop in your credit score and possibly an increase in the interest rate on your new refinanced loan.