A lot of homeowners often consider applying for mortgage refinancing to help reduce their mortgage rate as well as their monthly payments. And because of the promising deals that often accompany refinancing, homeowners tend to overlook its effects on their credit score. This is why, before you sign any deal, you should consider a few factors first.
- Your credit report will be checked. If you are going to apply for mortgage refinancing, the lender will take a look at your credit score as well as your credit report which will trigger a hard inquiry. Every time there is a credit inquiry, there will be a few points knocked off from your credit score. If you’re shopping for rates within a week or two from multiple lenders, the inquiries will only appear as a single inquiry in your credit report. However, if your inquiries are months apart, your credit score will take a hit when a credit check is done.
- Late payments on your mortgage loan can backfire. Keep in mind that refinancing your mortgage will take some time. What this means is that your existing loan still needs to get paid. If you become late on your payments, expect that it will affect your credit score. Worse, the lender can even cancel your application when they see your delayed payments. Not a good sign if you want to apply for mortgage refinancing.
- Using your home equity may affect your credit score. It is understandable that you will want to use the equity you have built up with your existing home when you need extra funds to renovate your place, send your kids to school, or perhaps for an emergency. However, if you choose a home equity loan or home equity line of credit, your debt load will go up. Keep in mind that 30% of your FICO credit score is for the amount of debt that you owe. If you increase your debt, it will cause your credit utilization ratio to go up which can lead to higher debt-to-credit ratio which can make you look like a risk to the lender.
Mortgage refinancing may help lower your mortgage rate for sure, but you need to consider what impact it has to your credit. It would be a good idea to check your credit report before as well as after you refinance your loan to ensure that there won’t be any surprises waiting for you afterwards.
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