- Posted by: hoth
- Category: refinance
The number of inquiries made into your credit report accounts for 10 percent of your credit score. When you refinance a mortgage, your goal is to get a lower interest rate and lower monthly payments. Sounds great, right?
In most cases, refinancing a mortgage is a financially healthy option. Just keep in mind how it could impact your credit score.
Refinancing a mortgage means you pay off the original loan with a new one. There are many different reasons to do this, but does it hurt your credit?
Your credit score is influenced by several factors. Here we’ll take a look at these factors and help you answer the question Does refinancing hurt your credit?
The Number of Hard Inquiries
Every time you apply for a new loan, you accrue a hard inquiry on your credit report. These account for 10 percent of your overall score – and too many will negatively impact your credit.
These hard inquiries will stay on your credit report for 24 months. After 24 months, each will drop off your report.
If you’re not careful, these could add up to the multiple hard inquiries on your credit report.
If you apply for multiple loans within a certain window, usually between 14 and 45 days, they will all count as one inquiry. Ideally, try to get your loan shopping done within a shorter period of time.
Try to avoid taking too long to search for the best rates. You may end up with multiple credit inquiries on your report, damaging your credit more than you’d anticipated.
If you recently applied for a car loan or other loans, you should wait several months before you refinance. You will be able to gain back any points you lost from that credit inquiry.
Your Old Loan Will Close
This may seem like a great thing. Your old loan is paid off!
However, a portion of your credit score is influenced by the age of each of your credit accounts.
When your old mortgage loan closes, you will no longer have it to increase the average age of your accounts. This could negatively impact your credit score as you begin paying on the new loan.
If you have been paying on your old mortgage for a while, you should take this into consideration. Before you refinance, consider how losing an old account will impact your credit.
Some credit scoring models will take into account how long you made payments on the old loan. Even if the account closes, credit bureaus may still recognize that you consistently made payments.
As you pay on the new loan, your credit score may return to normal.
Stay on Top of Your Payments
This is the most important aspect of your credit score. You must be able to make all your payments on time.
Payment history accounts for 35 percent of your credit score. If you miss payments, make late payments, or have any accounts in collections, you could see a big impact on your credit.
Getting a new loan on your home can take a while. During the course of this process, don’t forget to make payments on your existing mortgage.
It can be hard, especially when you need to pay closing costs and other fees on the new loan. Make sure you’ve saved up enough money before you apply for a new loan.
It’s common to miss payments during the transition period. The payment on your new loan may be due after the due date of your old one.
When you get approved for a new loan, talk with the mortgage broker or loan officer to make sure you make the first transition payment on time.
If you miss either payment during this period, your new loan could be canceled.
Does Refinancing Hurt Your Credit? Carefully Weigh Your Options
Before you decide to refinance, check your credit score with the major credit bureaus. These inquiries won’t impact your credit score. You want to be sure your credit is good enough to get a good deal on a loan.
Consider how it will impact your credit score. You may find that the payments on your current mortgage loan are too high. Often, the choice to refinance will benefit you in the long term.
Your payments may be easier to make, and you may be able to boost your credit in the process.
However, you may find that you will be paying more in interest over the long term. Before you make a decision, you should carefully crunch the numbers to make sure you’re making a financially sound decision.
If you refinance later in your mortgage, it may be like restarting with a 30-year loan. More often than not, it makes more sense to refinance early on.
If you want to compare savings, try using a mortgage calculator. Compare your current loan with the new offer and decide whether or not the cost saving will be worth it.
Remember that you will need to pay closing costs and fees on your new loan. Before you even think about refinancing your mortgage, make sure you have enough cash on hand.
These costs can quickly add up and get in the way of your day to day finances.
If you’re financially responsible, you should be able to make your loan payments on time. In the long run, the credit inquiry will drop off your report, and you’ll build a solid payment history with the new loan.
This will have a positive impact on your credit score. Time is on your side.
Refinance Your Home Today
Once you decide to refinance your home, you may begin shopping around for the best rates. You may be wondering, “Does refinancing hurt your credit?”
The short answer is yes, but the choice to refinance may benefit you in the long run. You need to do some shopping and compare cost savings.
To find out how you can refinance your home and increase your savings, check out our other blog posts. We are here to help you make an informed decision!