Refinancing will hurt your credit rating a bit at first, but it could actually help in the long run. Usually, your score will drop a few points, but you can recover in a few months. Refinancing and loan modifications may temporarily lower your FICO scores in some areas, but they can save you money with a lower monthly payment. The extent to which a rating is affected depends on how it is reported and on the additional information in your credit report.
Refinancing a mortgage, car loan, or other debt can be an effective way to access a lower interest rate or lower your monthly payment. However, refinancing can harm your credit, so it's important to understand the process and the consequences before using the strategy to manage your debt. If you're considering refinancing a mortgage, use a mortgage refinancing calculator to determine the breakeven point. Similarly, if you need to take advantage of the equity in your home, refinancing your mortgage is a great option way to do it.
Refinancing your mortgage may take longer than expected, so don't expect the process to close in any given month. Applying for several types of loans at once can lower your credit score faster than if you focused solely on refinancing a mortgage, says David Battany, executive vice president of Capital Markets at Guild Mortgage. If your current mortgage was one of the first debts you incurred, refinancing for a new one can have a very negative effect on your score. In addition, refinancing a mortgage generally involves extending payments over a longer period of time.
While there are many long-term benefits to refinancing your mortgage, there are some ways refinancing can affect your credit rating in the short term. Under the right market conditions, refinancing can help you save long-term interest, but it can also help you eliminate a Federal Housing Administration (FHA) loan with high mortgage insurance premiums. However, keep in mind that refinancing a mortgage involves closing costs, including origination charges, appraisal costs, title insurance, and credit reporting charges.
