Mortgage interest rates are going down. So what does that mean for you? It’s simple: a lower rate decreases your interest cost which in turn lowers your monthly payment.
However, first things first. Do you have a high enough credit score to refinance? Most lenders require a minimum score of around 620. If your score is a lot lower than that, find out how to improve your score. If your score is in that range, you’re on the right track for refinancing.
- Save Money
When interest rates go down you can possibly refinance into a loan with a rate lower than what you’re paying today. That could mean large savings when dealing with long-term loans. (BTW, if you want to see how FICO® Scores affect the interest you’ll pay on a loan, check out FICO’s loan savings calculator.)
- Lower Monthly Payments
In one sense, refinancing resets the clock and extends the amount of time you’ll have to repay the loan. That additional time, along with your lower balance (since you’ve probably already paid off some of your loan), means your monthly payment should decrease.
- Debt Consolidation
If you have several loans, combining them into a single loan with a lower interest rate can save you money. Plus, it’s easier to keep track of one instead of multiple loans.
How Refinancing Affects Your Credit Score.
The three points above are very positive. They show you how a mortgage refinance can save you money and make things easier. On the other hand, refinancing can affect your credit score. How? We’re glad you asked…
- When you apply to refinance a loan, lenders check your credit score. This is known as a “hard inquiry”. This inquiry is added to your credit report and could lower your score.
TIP: Let’s say you’re applying to 6 lenders. Try to complete shopping for your loans and submitting applications within 14 to 45 days. If you do this, your credit report will show a single inquiry rather than 6 and your score will be minimally affected.
- A refinanced loan can be considered a “new” loan or a “current loan with changes”. It all depends on your lender and how the refinance is structured. If it’s considered “new”, your current loan will be closed. The closing of a long-standing credit account can hurt your credit score because it can increase your… get ready for it… credit utilization ratio. (Best to click the link to understand the term’s full meaning.) However, if your loan has been open for a long time and had a high credit limit and low balance, it may have a positive impact on your credit score.
TIP: Knowing if refinancing will have a positive or negative effect on your credit score can be tricky. So take it slowly and ask your lender as many questions as you can think of. And keep an eye on your credit report before, during and after the refinance process. This will help you make the right moves in the future.