If you want to change the terms of your home loan, you can with a mortgage refinance.
Refinancing replaces your current mortgage with a different one and gives you a chance to adjust the interest rate, length and size of your loan.
Refinancing shows up on your credit report, but it doesn’t have much of an effect on your credit score.
There are just a couple trouble spots to watch out for.
The actual refinance has no impact.
The rating agencies don’t consider this transaction for their calculations, so refinancing won’t increase or decrease your score.
What will happen is your credit report will show you’ve taken on a new loan at different terms. Your old home loan will also be marked as paid.
“During a refinance, the biggest
risk comes when swapping loans.”
Loan applications slightly drag down your score.
Every time you apply for a home loan to get a rate quote, it will slightly bring down your credit score.
This is because the lender will make an inquiry into your credit rating. Each inquiry brings down your score by about five points.
Despite this small credit hit, it’s still worth shopping for the best terms because the credit impact is minimal, while getting the best mortgage terms makes a big difference financially.
One way to minimize this problem is to apply for all your loans in a short period of time, like two weeks, because the rating agencies will then count all these applications as only one inquiry.
Be careful not to miss a payment during the switch.
During a refinance, the biggest risk to your credit score comes during the month you are swapping loans.
You might be in a situation where the new lender tells you not to worry about your mortgage payment on the old loan because the new loan will pay it for you.
This would be fine if everything goes through on time. The risk is the new loan takes longer than expected to start up and is late on making your last payment on the old mortgage.
Missing loan payments badly hurts your credit and can drop your rating by up to 100 points.
If you are in this situation, voice your concern to the new lender and get their guarantee that they won’t be late on your mortgage payment.
As long as you can avoid these two problems, your credit score should stay intact after the refinance. Keep making the payments on time for your new loan and soon your score will be even better.
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