A mortgage loan can have a fixed interest rate for a portion or the entire term of the loan. Though the interest rate will always be greater for an adjustable rate mortgage. If you attempt to refinance the mortgage, the financing terms (the type of loan – new, seller financing, assumable, etc. and the amount to be financed) are the unavoidable factors that will stand in the way.
You could get a better interest or reduce the length of your loan, which can save you money for the remaining term of the loan. In any case, along with the benefits, bear in mind that mortgage refinancing could also have adverse effect on your credit score.
The following are different conditions under which mortgage refinancing can hurt your credit score:
- Several credit inquiries could have a strong effect on your credit report. Hard inquiries stay on your credit report for 2 years, depending on your credit history and borrowing habits, therefore can hurt your credit score. New credit makes up 10 to 12 percent of your credit score. Hence during the process of refinancing your loan, you may want to shop around with different lenders to find the best loan terms when you are refinancing. Nonetheless, note that when your prospective lender with whom you have applied for a loan reviews your credit history, it results to a “hard inquiry” on your credit report.
- Any mortgage refinancing will be reflected on your credit report as a brand-new loan. You have opened a new loan when you refinance your mortgage and on the other hand, you have completely paid off the old one. How long different accounts have been recorded plus the recent activity on your account are shown on credit report. Consequently, mortgage refinancing and closing an older account can have adverse effect on your credit score. The older accounts reflect your unvarying ability to make monthly payments. Note that the length of your credit history represents 15 percent of the credit score.
- Make consistent mortgage payments during the refinancing period, otherwise, you will inflict unintended harm to your credit score. Any missed or late payment could adversely harm your credit score. Mortgage refinancing can take longer than you might anticipate. Do not assume a certain date for the closing. You will be hot water if you avoid mortgage payment by expecting the refinance to go through at a wrong month. Frequent communication with the lender is the most preferable avenue to ascertain the payment schedule is the most avenue to stay on top of all relevant information. Your payment history makes up 35 percent of the credit score. Any missed payment is reflected on your credit report for no less than seven years from the first date of willful neglect.
Mortgage refinancing may have some adverse effect on your credit score, but the most significant in the long run is how effectively you handle the new loan.