How to Qualify for a Good Mortgage Rate in Utah
Has your credit improved since you took out your mortgage and led you to seek a better rate? Has your income increased, enabling you to pay down your home loan faster? Are you interested in making monthly mortgage payments so you have more expendable income? Whatever your reasons for refinancing, this option can give you newfound financial freedom and better loan terms.
But is refinancing bad for your credit? Here is the deal. While it won’t cause irreparable damage to your score, refinancing will temporarily knock off a few points. But as long as you’re sure you will achieve your financial goals with a refinance, it could be a wise financial move that saves you money in the long term. Below, read in more detail about refinancing and the impact it can have on your credit.
What Is Refinancing?
If you’ve never refinanced a loan before, it involves paying off a current loan with a new one that offers a more favorable interest rate and/or term. You can refinance through the original lender or a new one that can offer better rates. While most people choose to refinance in order to reduce their monthly payments by getting better interest rates, some people do it to shorten their term and make larger payments to pay the loan off sooner.
How Does Refinancing Affect Your Credit Score?
Hard inquiries
So how does refinancing hurt your credit? Credit checks are a standard part of every loan refinance application. A lender needs to know that you will pay them back, and they can see how likely you are to do so by looking at your credit report — which shows your payment history, your open credit accounts, how much credit you’re using, and more. Upon submission of a formal loan application, a creditor will run your credit report, which will show up on your credit score as a “hard inquiry.”
These hard inquiries will knock a few points off of your score, but you can make it count by prequalifying with many different lenders to find the best terms and getting all your applications in within a small window of time. All of these pre qualifications will count as soft inquiries, which means they won’t impact your credit score. Inquiries made within a 14 to 45 day time frame usually only count as one inquiry, as the credit bureau can see that you’re loan shopping.
You’ll only be hit with a hard inquiry once you select a lender and proceed with the refinancing process. As long as you make your payments on time and keep your balances low, your score will quickly rebound — and it will be worth the minor hit to have lower payments.
Closed accounts
If you’ve had your original mortgage loan for a significant amount of time, it could also hurt your credit to pay off that mortgage and close the account in order to replace it with the new loan. But so long as the closed loan’s payments were consistently paid on time, the negative impact on your credit score will be reduced — and as you make on-time payments faithfully on the new loan, your credit will start going back up.
Have questions? Get answers from an expert.
How to Decide Whether Refinancing Is Right for You
In summary — does refinancing your mortgage hurt your credit? It does a little, but as long as the benefit outweighs the slight dent to your credit score, refinancing will be well worth it. You may be a good candidate for a mortgage refinance if:
- Your financial situation has improved since you purchased your home
- Your current mortgage rate is high and current rates are low
- You have the disposable income to shorten the term of your mortgage
When it comes to your finances, it’s always beneficial to consider your credit and think carefully through your options. But if it makes sense to refinance in your situation, do it! You could receive lower interest rates or monthly payments.
Consult With Loan Remedy About Refinancing Today
Everyone’s circumstances are different, so get a professional opinion before making big financial decisions. Loan Remedy is here to help. Give us a call today to learn more about how refinancing affects your credit and whether or not this move is right for you.
