With mortgage interest rates close to historic lows – and fears that next year will lead to higher rates – now might be the time to refinance if you’ve been sitting on the fence.
“It might be a good time to refinance, because of the low rates,” says Robert Heck, vice president of mortgages for Morty, an online mortgage broker. “Rates are expected to increase in 2022. Homeowners looking to take advantage of these rates may want to act quickly. “
Undergoing mortgage refinancing, aka “refi”, can be a useful way to save money on your monthly payment and take advantage of lower rates. Refinancing is especially beneficial when your credit score has improved since taking the original loan, making it a popular choice for homeowners who have been in their homes long enough for financial dust to settle and settle in. as new money-saving options open up.
But could a refi impact your credit score? If you’re wondering if refinancing a home is worth it, it’s important to weigh the potential negative effect on your credit score against the savings. Here’s what you need to know to make a decision.
4 Ways Mortgage Refinancing Affects Your Credit Score
Refinancing your home can be a way to lower your monthly payment and save money on interest, according to Michelle Lambright Black, founder of the educational site CreditWriter.com.
“If you can get a lower interest rate on your mortgage, for example, refinancing might be a good financial decision,” says Black. “However, refinancing can negatively impact your credit score. “
Here are some of the refi credit score pitfalls to consider.
Refinance multiple times
Every time you refinance, a serious new investigation is added to your credit history, according to Black. These requests represent approximately 10% of your FICO credit score. Your FICO score is calculated using a proprietary algorithm, Heck explains, but there are some indications of the approximate impact that different actions can have.
“Credit requests tend to be minor in terms of impact on credit score,” says Black. “But there is a risk of a downgrade in credit scores every time these credit checks take place. ”
Credit rating declines tend to rebound a few months after the thorough investigation, especially if your other credit health metrics, such as credit usage and on-time payments, are in good standing.
Refinance again in a short period of time
A refi loan can also have an impact on your credit score if you refinance multiple times over a short period of time.
When you shop, several inquiries about the same type of loan are usually grouped together, says Heck. However, a second refinancing close to the first is a different proposition, and a lot of new business over a short period of time is often seen as a red flag.
It’s not just about refinancing your home, either, according to Heck. If you are considering multiple types of loans at once, you can lower your score.
Avoid opening too many lines of credit at once. When you decide to refinance your home, don’t get other loans at the same time.
“If you shop with a bunch of different lenders, it’ll all be bundled into one application,” says Heck. “Offices shouldn’t cut this down for everyone. Things get darker if you are looking for a refinance and car loan, as well as credit cards.
Try to avoid opening multiple lines of credit in a short period of time, recommends Heck. Whether it’s doing multiple refinancing operations or getting other types of loans at the same time you refinance.
Old Debt Against New Debt
Another factor that impacts your credit score is the age of your lines of credit, says Black. When you refinance, the age of your loan is reset. You end up with a new line of credit which can negatively impact your score.
“The older the items on your credit report, the better from a credit score standpoint,” says Black. “Refinancing adds a new line of business to your credit report, and it could lower your average credit age, which is usually not a good thing for your credit score.”
According to the FICO scoring model, the age of your lines of credit represents approximately 15% of your score.
How refinancing with withdrawal can hurt your credit score
Refinancing with cash could potentially indirectly hurt your credit score if you don’t use the money to pay off other debt, Heck warns.
For example, if you use the money for a vacation or a wedding, you increase your total debt load. Hence, this type of refi loan could hurt your credit score.
On the flip side, Black points out, using cash out refinancing to pay off credit card debt and other loans might actually improve your overall credit score.
“When you use an installment loan, your new mortgage, to pay off revolving credit card debt, your credit utilization rate should go down,” says Black. “Using a cash refinance to pay off other debt can also reduce the number of accounts with balances on your credit report, another potentially positive credit score move. “
Is refinancing worth it?
Depending on the situation, it might be worth refinancing your home, even with the negative impact on your credit score. Heck and Black both point out that the savings from refinancing may outweigh the temporary impact on your credit score and some of the costs associated with refinancing.
The negative impact should be minimal, says Heck. Recovery after the small fall is relatively quick.
When Should You Refinance Your Home?
Take a close look at your current financial situation. If you’re worried about rising interest rates, maybe now is the time to start shopping around to lock in a rate before the situation changes.
In addition, it is important to consider your other financial goals. Heck suggests planning your loans in a way that minimizes their impact on each other. For example, you might try to avoid getting a new car loan at the same time you refinance your mortgage. Space your loans out so that they have less impact on each other.
“If you are considering applying for new financing, such as a car loan or mortgage, you may want to consider delaying your refinancing until these new loans close,” agrees Black. “Otherwise, a potential drop in your credit rating from refinancing could cause you problems. ”
Is A Refinance Loan Right For You?
Black suggests using an online mortgage calculator to compare the costs of a new loan with your current loan. She points out that there might be new fees to worry about – including new closing costs – so you’ll need to calculate whether the savings will outweigh the costs. Even though you might temporarily end up with a lower credit score, it might be a good idea.
“Remember, the whole point of getting good credit is to be able to use it to your advantage,” says Black. “Using your good credit to qualify for a more attractive loan could help you save money on interest and maybe even pay off your debt faster. “