As interest rates drop significantly, many people are talking about refinancing their mortgage (along with other loans). However, something that they might not realize is that this will affect their credit score, which may not make it a smart decision at this time.
How Can Refinancing Affect Your Credit Score?
Unfortunately, the truth is that refinancing can lower your credit score for several reasons. These include:
Credit checks. When you apply for a loan, the mortgage company will check both your credit score and your credit history. This is what is known as a hard inquiry, and it will drop your credit score. If you apply for several different mortgage loans, (which most people do to make sure that they get the best deal) it can make a difference in your overall credit.
Closing an account. When you close your current mortgage, it will lower your credit score because you are closing on a long-standing credit account. However, as long as you paid it regularly, it won't decrease as much as it could if you were behind on your mortgage.
That being said, if you open your new mortgage loan and pay it regularly (and on time), your credit should go back up. You are going to prove that you can handle credit and your score will improve.
What Are the Benefits of Refinancing?
Even though you may be worried about lowering your credit score, there are many benefits to refinancing, including:
Lower interest rates mean lower monthly payments. When you refinance with lower interest rates, you are going to be able to reduce your monthly payments. This can sometimes amount to several hundred dollars less per month in payments. The other option is to shorten the term of your loan so that you can pay it off sooner than you expected. You may be able to get a loan for fifteen years instead of the full thirty. You may also decide to take the longer mortgage and just pay extra every month toward the principal balance.
Help improve your budget. When your biggest bill every month drops significantly, you are going to have a lot more wiggle room in your budget. It can help a lot if you have a family to account for. You'll be able to spend a little more money on essentials so that you aren't living paycheck to paycheck - and if you weren't living paycheck to paycheck before, then you have even more disposable income to use on your wants instead of just needs. You may decide to start saving for a vacation that you always wanted. You could splurge a little bit, or stay on the safe side and save for the future.
Consolidate your debt (or have some extra money in your pocket). Unfortunately, many people live paycheck to paycheck and find themselves in some debt. They may have a car payment, credit card debt, and even student loans. This can be very frustrating when you are paying off multiple things at once. You may struggle to pay the minimum each month and don't see much difference in the loan amount from month to month. By consolidating your debt, you will have one big payment every month
Extra pocket money. You may decide to buy your next vehicle with this money instead of taking out a loan. You could do home repairs and other costly tasks with this extra cash. You may also want to put together an emergency fund, or invest it, so that you don't have to stress about money as much in the future. You can use this money however you want.
Is It Worth It?
As interest rates drop significantly, many people are talking about refinancing their mortgage (along with their other loans). Though this may seem like a good idea, it is important to weigh your options before you rush any decisions. You need to consider how refinancing your mortgage can affect your credit score. That being said, there are many benefits to refinancing so it is important to go through your options before you make your final decision.
If you aren't sure about whether or not you should refinance your home, don't hesitate to contact one of our First Savings Mortgage loan officers. We would be glad to talk to you about your options so that you can make the right decision for you and your family.