Refinancing & Credit
You want to refinance your mortgage loan to take advantage of the low interest rates that lenders are offering. You have everything you need to qualify: a steady job, a high gross monthly income and a home that has maintained its value. All you're worried about is your credit score. A bad credit score can scuttle your attempts to refinance your mortgage loan. Before talking to lenders, it's important to learn the basics of how credit impacts your ability to nab a mortgage refinance.
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Your Credit Score
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Most consumers have a credit score. This three-digit number encapsulates your past history with credit. It shows whether you have a history of paying your bills on time or if you tend to skip payments or make them late. On the most popular credit-score scale, the FICO scale, good credit scores are now considered 750 or higher. These scores will make you eligible for the lowest possible interest rates when you are refinancing your mortgage loan.
Credit and Your Refinance
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The goal when refinancing your home loan is to reduce your monthly payments by shaving points off the interest rate attached to it. Depending on the size of your existing loan, and the amount your interest rate drops, you can save $100 or more every month in mortgage payments. However, if your credit score is too low, you won't qualify for the lowest interest rates. If this happens, the drop from your current interest rate might be too low to make refinancing a worthwhile task. Refinancing isn't free. Generally, you'll pay from $2,000 to $6,000 in closing costs, depending on the size of your mortgage loan.
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Why Credit Matters
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Lenders rely so heavily on credit scores because they have proven to be a good indicator of how likely borrowers are to default on their mortgage payments. Borrowers with low credit scores -- any FICO score under 700 is generally considered by mortgage lenders to be low -- tend to have histories of missing credit card payments or making late car-loan payments. They might also have bankruptcies or housing foreclosures in their pasts. Because they are riskier consumers, mortgage lenders charge them higher interest rates. The higher rates act as a form of financial protection for these lenders.
Improving Your Refinancing Odds
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If your credit score is currently too low to nab you the lowest interest rates, don't panic. You can eventually refinance. You'll just have to take the steps necessary to boost your credit score. You'll have to start a new history of paying your monthly bills on time, without fail, and cutting down on your credit card debt. Don't expect quick results, though. It takes many months of mature financial habits to boost a credit score. You might have to wait a year or more before applying again for a refinance.
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