How Getting a Refinance Could Impact Your Credit Score
A refinance might solve your issues if you’re looking to lower your current mortgage rate and reduce your monthly payments. But take note that opting for a refinance could impact your credit score. Below are some vital things you need to consider before shopping around for a refinancing deal.
Potential Lenders Would Look at Your Credit History
Credit inquiries would be displayed on your credit report. Every single credit inquiry could reduce your credit score. In general, if you are shopping around for a refinance deal within several days of each other, your credit report would show these loan applications as one credit inquiry.
However, if you shop around and apply for a refinance deal for several months, these would show up as separate credit inquiries and applications. In turn, your score would significantly drop, and you might find it more difficult to get a great refinance deal or even qualify for one
Closing your Old Home Loan Could Backfire on You
When refinancing, you are basically closing out your current mortgage with a new mortgage. But when your credit score is concerned, your credit’s age matters a lot because FICO bases 15% of your score on the age of your credit, says a mortgage broker from First Class American Credit Union, a top credit union in Fort Worth.
Basically, lenders consider a long credit history as an accurate indicator of your ability to manage debt, he adds. This means that closing out your home, especially if you’ve been paying it off for years could negatively impact your credit score if you are also looking to obtain a new mortgage.
Using Equity in Your Home Could Negatively Impact your Credit Score
If you have enough equity built up in your home and are looking to use it for doing some home improvements through a home equity line of credit or home equity loan, you would be increasing your debt. This is crucial since 30% of your credit score would be based on your debt load. This means that taking on more debt would likewise raise your credit-to-debt or credit utilization ratio. In turn, this might communicate to lenders that you’re a high-risk borrower.
The Main Takeaway
Getting a refinance could save you some cash if you manage to lower your mortgage rate. However, it’s vital that you consider how refinancing might affect your credit score. If you’re intent on refinancing and want to avoid unnecessary surprises, check your credit history first and go from there.