Refinancing your mortgage might be a good idea if you find out that your interest payable every month will be reduced. Although, you should not rush into this action. You must first prepare your credit situation for this transition to occur.
The effect on your credit score
This operation might affect your credit score negatively, mostly because of these specific situations:
- They will do a hard inquiry on your credit report. This means that the lender will check both your credit score and credit history.
- Multiple loans. You will be applying for another loan, so, as we have explained in previous articles, applying for various loans or credits affect your credit score negatively.
- The loan you are refinancing will be closed, this means that an account will be closed, so your credit score will be directly affected in a negative way due to this operation.
- It might be hard to tell when you have to stop paying the old mortgage and when to start paying the new one, so, because of this you might have some late or missed payments that will affect your credit score negatively.
Mitigate the impact
To avoid a major impact on your credit score, you should be prepared to refinance your mortgage. Here are a few tips:
- Don’t ask for other loans while you are in the process of refinancing your mortgage. Try to avoid any other loan request in the short term after you refinance your mortgage.
- Compare your options. See which lender gives you the best offer for you to take that step forward into refinancing your mortgage.
- Don’t miss any payments on your current loan to avoid affecting your credit score negatively.
Refinancing your mortgage is a smart move if you’re lowering the interest you are currently paying. At first, you will see your credit score go down, but if you are consistent with your payments, your credit score might improve over time.