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If you haven’t refinanced your mortgage since the pandemic began, now is a good time to consider applying. Refinance rates continue to be at attractive levels, so you have a great opportunity to lower the interest rate on your existing mortgage and lower your monthly payments in the process. If you plan to stay in your home for the foreseeable future, refinancing is a decision that could mean a lot to you.
With that said, there is one scenario in which you should consider delaying an application for refinancing: if your credit score is in need of improvement. In fact, mortgage lenders will take this score into account when deciding whether or not to approve your refinancing and when determining the interest rate to grant you on a new home loan.
Why Your Credit Score Matters With Refinancing
Some mortgage borrowers are surprised to learn that their credit scores are an important factor in getting approved for refinancing, and you could be in the same situation. After all, if you have a mortgage to start with, that means your credit score was strong enough for that loan to be approved – so why put so much emphasis on your credit score now?
One thing you need to remember is that a refinance is always a loan, and a big deal at that. Any lender who gives you a new mortgage will want to be reassured that you will be able to pay off that loan on time and in full.
Suppose you have $ 200,000 left on your mortgage and you want to refinance. Even if your home is worth enough money to cover your loan balance, lenders don’t sell homes, they collect mortgage interest. And so, if your credit is poor, you could be turned down for a $ 200,000 loan because it is money that a given lender will want to get back without having to bother with foreclosing on your home and forcing it to sell.
Another thing to keep in mind is that some borrowers refinance their mortgage years after taking out a first mortgage. If this is your case, your credit history may have changed a lot since your initial mortgage was approved.
In the past year, you may have been late with some bills and built up a high credit card balance, which can hurt your credit score. And so it stands to reason that any refinance lender wants to get a more current picture of your credit rather than relying on an outdated number.
How to increase your credit score
If you are interested in refinancing but know your credit score needs improvement, there are several steps you can take to increase it:
- Pay all your bills on time.
- Eliminate some of your existing credit card debt.
- Apply to increase your credit limit, which could lower your credit utilization rate, even if you can’t pay off your credit card debt.
- Check your credit report for errors and correct any errors you spot.
Whether you like it or not, you’ll need good credit not only to get approved for a refinance, but also to get a competitive interest rate on your new mortgage. The higher your credit score at the time of your application, the more likely you are to save money.
A historic opportunity to potentially save thousands on your mortgage
There is a good chance that interest rates will not stay at multi-decade lows any longer. That’s why it’s crucial to act today, whether you want to refinance and lower your mortgage payments or are ready to pull the trigger to buy a new home.
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