You can save money by refinancing your loan. It can help you in reducing your monthly payments, and you can also decrease the total interest amount that you have to pay in some specific cases.
Both of the above reasons alone are just enough to convince most people to refinance. However, what impact does it have on your credit scores – does refinancing your loan negatively affect your credit score?
A minor short-term impact
When you refinance, you might see a very small effect on your credit score. If you understand how credit scores work, then it will make sense for you as you’ve again applied for a loan, which typically lowers your credit score slightly. The critical question is whether it matters or not; however, we’ll get into the details below.
Refinancing might also help you to improve your financial condition significantly. Will you refinance if it causes your credit score to go down temporarily? What’s the benefit of having a good credit score if you don’t utilize it to get the maximum benefits? The main idea of having a good credit score is to secure better loans (besides, it can help you with renting, insurance cost, and other job searches). There are very few reasons for not using it if you’ve got that ability to utilize it.
When you should avoid refinancing
There might be two conditions on which you might not want to consider a refinance (one of them is linked to a hit to the credit score). Though you’ll have to utilize your own judgment- there can be other circumstances, and the cases below may not be that bad.
You want to apply for an important or a larger loan soon:
In case you’re planning to get an important loan (for example, to purchase a new home), think twice prior to refinancing. You might not want to decrease your credit score just before that situation as you might have to pay a higher interest rate, and your loan might get rejected as well.
Wait until your major loan is approved first then refinance your lesser loans. The same rule is applicable if you’re planning to refinance numerous loans: first, calculate benefit for all of your loans and list them, then beginning with the one that will benefit you the most and go downwards according to the list.
The new loan is not any better:
One more reason to avoid a refinance is that it might get you into a worse financial situation than you were before. You might be able to get a lower rate of interest or get a lower monthly payment, but what will you have to give in return?
You’ll often prolong the term of the loan when you refinance your old loan into a new loan; the payments at the start of the loan will be mostly interest, and it’ll take you longer to pay it off. This especially happens with longer-term loans – for example, if you only have 15 years left on your current mortgage and you refinance to a 30-year program – the benefits will be reset.
At Lendova, we believe in providing affordable mortgage solutions for everyone. Please call us today so that we can provide you with a custom-tailored solution or please visit our website at www.lendova.com