Refinancing your home is an important financial decision that can impact your credit score and your overall financial situation. Refinancing can help you reduce your monthly payment, lower your interest rate, or switch from an adjustable rate to a fixed rate.
However, the process of obtaining a new mortgage can also have a negative impact on your credit score. In this article, we’ll cover how refinancing your home can affect your credit score and the steps you should take to minimize any negative impact.
What Is Refinancing?
Refinancing is the process of obtaining a new loan to pay off an existing loan. When it comes to home mortgages, refinancing is typically done to reduce the interest rate, to obtain a better loan terms, to move from an adjustable-rate to a fixed-rate mortgage, or to access the equity in your home. Refinancing can also help you pay off your mortgage faster.
How Does Refinancing Affect Your Credit Score?
Refinancing your home can cause your credit score to drop in three different ways. First, when you apply for a new mortgage, the lender will perform a “hard pull” on your credit report. This will negatively impact your score by a few points.
Second, as you’re paying off your existing loan, you may also experience a temporary drop in your credit score. This is caused by a decrease in your average account age, which is one of the major components of your credit score. Lastly, when you go through the process of refinancing, the potential changes to your credit utilization rate can cause your score to drop as well.
What Can You Do To Minimize The Negative Impact?
While refinancing can have negative repercussions on your credit score, there are ways you can minimize the impact. First, be sure to shop around for the best possible terms. Make sure you’re getting a sizable reduction in interest rate, since this could potentially more than make up for any drop in your score. Also, be sure to read the fine print of the loan.
Make sure you understand the terms of the loan and if there are any potential hidden fees. It’s also a good idea to keep track of your credit score during the process, in order to see how much it is going up or down.
Final Thoughts
Refinancing your home can be a great way to lower your monthly payments or lower your interest rate. However, it can have a negative impact on your credit score. The best way to minimize the negative effects is to shop around for the best terms, make sure you understand the fine print, and keep track of your credit score during the process. Refinancing can still be a great option, as long as you understand the potential risks and take the proper precautions.
