A home serves as a significant investment. With mortgage refinancing, you will be provided with the option to use your property to leverage that investment. Refinancing may allow you to shorten the term of your loan. It can also help lower your monthly payments and provide you with cash.
When you refinance your home, you are trading in your old mortgage for a new one. The interest rate will usually be different, and the principal will also be different in most cases.
Refinancing can lower your credit score due to the involved credit check. If you apply for several loans over several months, it may have a long-term impact on your credit score.
Also, your credit score may take a hit because you will be closing an account when you refinance. In other words, the loan that you are refinancing will be closed to facilitate the second loan.
Closing a long-standing account will have at least a temporary impact on your credit score. How hard your credit score will be hit depends on multiple factors, such as whether you opt to refinance or if you refinance again after a short time has passed.
How Refinancing Affects Your Credit Score
Lenders will assess your credit history and score when you apply for refinancing. The hard inquiry on your report will usually cause your credit score to drop by a small to moderate amount.
Trying to get the ideal loan terms will usually involve applying to multiple lenders to try and get the lowest interest rate. If you want to avoid hard inquiries hurting your credit score, send out all of your applications within a 14-day period.
Closing an account will also affect your credit score. Remember that when you are refinancing, you are replacing your existing mortgage with a new one.
Closing a credit account that you have had for years, or even decades, in some cases will have at least a temporary impact on your credit score.
What are the Benefits of Refinancing a Mortgage?
If market mortgage rates have dropped since you first applied for your mortgage, refinancing may allow you to obtain a new home loan at a lower interest rate.
The lower interest rate will also translate to lower monthly payments, saving you quite a bit of money in the process. Costs can also be more predictable. For example, if you currently have an adjustable-rate mortgage, you can refinance your mortgage into a fixed-rate mortgage.
The fixed-rate mortgage will ensure that you don’t have to worry about rates possibly going up in the future. Refinancing can also allow you to shorten your term.
Many homeowners will begin with a thirty-year mortgage and make the switch to a fifteen-year mortgage after a few years have elapsed. By doing so, you will pay off your mortgage faster and save thousands in interest payments.
A cash-out refinance will also allow you to borrow against the equity in your home to obtain capital to fund virtually anything, including a new business or a home remodelling project. A cash-out refinance can also be used to consolidate your debts.
The money you receive can be used to pay off your credit card, student, and auto loans. You can reduce your total monthly payments and save some money that would have gone towards interest payments.
Moreover, refinancing may allow you to combine a home equity line of credit or second mortgage into a single mortgage at a lower rate.
Also, if you currently have mortgage insurance that your lender pays, you may be able to refinance once you reach the 20% equity mark. By doing so, you may be able to get rid of the premium that was integrated into your interest rate.
You can also refinance to remove a person from your mortgage, which is common after a divorce. As can be seen, the benefits of mortgage refinancing are myriad.
Rebuilding Your Credit Score After Refinancing
It is important to make on-time payments and maximize your credit limit benefits. Obtaining a secured credit card will also help, and getting a credit-builder loan is recommended, as it is designed to ease your credit profile.
Asking a friend or loved one to add you as an authorized user on their credit card will automatically benefit your credit without you even doing anything. Asking someone with good credit to co-sign a credit card or loan will also help you access credit.
You can begin to rebuild your credit in a few weeks by making sound financial decisions.
Refinancing will have a temporary negative impact on your credit score due to the hard inquiries involved as well as because of the closure of a long-standing credit account. However, making smart financial decisions will help quickly rebuild your credit score.