Mortgage

How refinancing impacts your creditworthiness and vice versa

Is the refinancing affecting your creditworthiness?

Credit defaults are all but inevitable when you apply for a new credit account, open a loan, or close one. Refinancing your mortgage involves all of these steps.

However, the loan defaults when applying for and opening a refinancing loan are very low – according to FICO often "less than five points".

The savings that you are likely to get from refinancing should far outweigh the negative impact on your creditworthiness. So don't let this happen when you apply.

Check your refinancing eligibility (May 24, 2021).

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How refinancing affects your creditworthiness

Refinancing may only reduce your credit score by a few points. However, this is inevitable when buying a new loan or credit account.

There are two reasons why refinancing is affecting your FICO score:

Length of credit history – FICO keeps track of the ages of your oldest and newest accounts and averages the ages of the others. So think twice before opening or closing an account, especially credit cards that have been around for a long time. Closing your current mortgage may have little impact if it has only been in place for a few yearsSoft and hard requests for new loans – If you check your own balance or a monitoring service does this on your behalf, it is a "Soft Credit Request" which means your score will not be affected. However, when you apply for a new loan, it is a "hard loan" and your score is a small hit. For most borrowers, the FICO says the hit is likely to be "less than five points." As long as you manage all of your accounts properly once the new ones are in place, your score should be back to normal within a few months

Also note that Experian, one of the big three credit bureaus, says that many credit scoring technologies will continue to take into account your old mortgage payment history even after you close it.

This can minimize the negative effects of getting your old loan. However, make sure that your current loan has a good reputation for refinancing. More on this below.

For most, refinancing should have little, if any, permanent impact on your creditworthiness.

Can Refinancing Help Your Credit Score?

In some cases, refinancing your mortgage can actually add to your creditworthiness.

If you're stuck with an unaffordable home loan and heavy mortgage payments are preventing you from paying off other debts, refinancing into a lower monthly payment can bring you a world of good.

Imagine if you could get a few hundred dollars off your monthly mortgage payment by refinancing. Now you can stop making minimal credit card payments and actually start paying off your debts.

Some homeowners even use payoff refinancing for debt consolidation.

This involves using home equity to pay down high-yield debt, thereby consolidating them into a single, lower-interest loan payment to save money on interest.

When done correctly, the positive effects of these strategies on your score will be much greater than the negative effects of refinancing.

Check your refinancing eligibility (May 24, 2021).

How your creditworthiness affects your refinancing

Your credit score affects your refinance much more than your refinance affects your credit score.

This is because a higher credit score can lower your mortgage rate significantly, while a lower score usually means paying a higher interest rate.

As CNBC puts it, "As long as your interest rates are high, you put less money into equity and assets and more money into debt servicing. And debt has no return on investment."

In short, making smart loan movements and keeping your score before refinancing can save you a lot of money in the long run.

Credit scores and refinancing rates

How Much Can You Save When Refinancing With A High Credit Score?

FICO has a page on its website that allows you to compare the cost of a mortgage based on your creditworthiness. We ran a sample scenario with a 30 year fixed rate mortgage of $ 200,000 and average mortgage rates on the day this was written.

Your own results will depend on your exact interest rate, loan amount, and location. The general trend, however, is clear: your creditworthiness makes a big difference in your refinancing costs.

FICO Score RangeMonthly paymentTotal interest payment (30 years)$ 760-850 $ 803 $ 88.999700-759 $ 826 $ 97.454680-699 $ 845 $ 104.293660-679 $ 869 $ 112.677640-659 $ 916 $ 129.899620-639 $ 979 $ 152,471

Of course, it's not just your mortgage that you're paying more for.

Your creditworthiness also affects the interest rates on auto loans, personal loans, credit cards, and other financial products.

Instead of asking if refinancing is hurting your credit, you could look at it the other way around: how can mortgage refinancing – or refinancing other debts at a lower interest rate – actually help your credit and improve your personal finances?

Check your refinancing eligibility (May 24, 2021).

Tips for Maintaining Your Credit When Refinancing

Smart homeowners compare the interest rates of different lenders when refinancing. If you want six quotes, does that mean your credit score is six hits?

Fortunately, no – getting multiple price offers won't affect your score multiple times. FICO says its score "enables rate shopping".

But you have to be smart about how you shop to protect your score – and that means you can get all of your offers in a few weeks or less.

Comparison shop during a focused period

In order to protect your creditworthiness when refinancing, all of your installment shopping applications must be completed within a certain amount of time. If it takes several months to request quotes, this can be considered a separate request.

For FICO, a “focused period” usually means that you will receive your price quotes within 30 days.

Newer versions of the FICO scoring model allow a 45 day period for price shopping. But don't take any chances. Many lenders use older versions of FICO to calculate your score.

Assuming you submit all of your tariff shopping requests within a single 30-day period, your score should only be a standard hit of five or less – just like someone who doesn't shop.

Further steps to protect your balance

Experian addresses an important point about homeowner refinancing: You need to be absolutely sure that you will make every payment on your original mortgage on time.

Especially if you have two mortgages at the same time, it is easy to get confused about how much you owe to whom. Worse still, sometimes your new lender may encourage you to forget about your final payment on your existing loan because your new mortgage will pay it back. But don't do that.

Not all mortgage lenders are role models of efficiency. And if your newbie pays just a day late, late payment is likely to have a negative impact on your creditworthiness.

What is your credit rating like?

We mentioned above that refinancing can impact two credit rating factors: the length of your credit score and the number of soft and hard queries on your credit report.

But how much do these things really affect your score?

To give you a better picture, here are all of the components that make up your creditworthiness – along with the weight they put in FICO's rating model:

Payment history (35%) – Late paying bills or skipping payments can quickly ruin your balanceAmounts owed (30%) – This is more about credit card balances than your total debt. Keep all card balances below 30% of their credit limit and you should be fineAverage age of credit accounts (15%) – The longer the better. But that looks like your current borrowing. So when you open a new account or close an old one, your history will be shorter and your score will be lowerCredit mix (10%) – This is your mix of “Credit Cards, Retail Accounts, Installment Loans, Financial Company Accounts, and Mortgage Loans”. You don't need one each, but a mix of revolving loans (mostly plastic) and non-revolving loans (installment loans, including those for cars and mortgages) will add a little to your scoreNew loan (10%) – If you apply for a lot of new accounts within a short period of time, a red flag will appear. However, if you evaluate the purchase of a single new loan, such as a refinance, and receive all of your offers within 30 days, you will get just one small hit

So these are the factors that FICO (and other scoring technologies) consider in order of importance. The two areas affected by the refinancing are lower down the ladder.

As long as you get it right, the refinance should cause only a small bump in your score – 5 points or less in most cases.

What are the current refinancing rates?

Refinancing rates are still at historic lows. But not all lenders offer the same rates. To find the best deal, you need to check with at least 3-5 mortgage lenders.

The good news is that getting multiple refinance rates doesn't affect your creditworthiness.

As long as you receive all of your quotes within a few weeks of each other, they'll count as a single request on your credit report. So don't let credit worries stop you from shopping and finding the best price.

Check your new plan (May 24, 2021)

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