Category: Mortgage

Can Refinancing a Mortgage Hurt My Credit?

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Refinancing your mortgage presents a great opportunity to save money by lowering your interest rate and monthly payments. If interest rates have fallen since you originally obtained your mortgage, or you’ve diligently worked on repairing your credit and improving your credit score, you might benefit from exploring your options for refinancing.

Before you do, it’s important to consider if refinancing could potentially hurt your credit. The way refinancing affects you depends on a few different factors. Let’s take a look at what refinancing is and how it can impact your credit.

What is refinancing?

The process of refinancing pays off your existing loan with a new loan. People commonly refinance to take advantage of better interest rates that will lower their monthly payments and save them money throughout the life of the loan. Refinancing is most commonly associated with mortgages but you can refinance any number of loans, including car loans, student loans, and personal loans.

How refinancing affects your credit

When applying for a new loan, the creditor checks your credit report with what’s called a “hard inquiry.” Hard inquiries lower your credit score by a few points. If you shop around for rates and creditors make multiple hard inquiries, this could negatively impact your credit score — unless you’re smart about it.

FICO treats multiple loan inquiries of the same category (auto, mortgage, student, etc.) in a short period of time as a single inquiry. If you shop around for rates but find the right loan within a specified period of time, your score will only be affected by a single inquiry. Keep in mind however, that this applies to rate shopping rather than applying for multiple new credit lines, such as credit cards.

Here’s where it gets a little complicated. The specified period of time varies depending on which version of the FICO formula the creditor uses. In the latest version of the formula, borrowers have 45 days to find the best rate. However, the period is only 14 days for older versions.

Refinancing also results in closing an old loan account and opening a new one. This means you’ll lose your payment history for the previous account in some credit reports. Since payment history makes up 35 percent of your FICO score, this could have a negative impact. Other reports and score models will continue to include your payment history for the closed account, which will result in negligible impact on your credit.

Should you refinance?

It always pays to consider how a financial decision will affect your credit score. In the case of refinancing, the benefits of lower interest rates and lower monthly payments far outweigh the negligible negative effects the process will have on your credit. The minor impact of hard inquiries on your credit report will fade over time as you build payment history with your new, refinanced loan, and benefit from extra money in your pocket.

If you’re interested in refinancing but are concerned about your credit report, the attorneys at Lexington Law understand consumer protection laws and legal rights. We work to ensure your credit reports remain fair and accurate.

Contact us for a free credit repair consultation, including a complete review of your credit report summary and score.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

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How to Get the Best Mortgage Rates Possible

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Buying a home can be a stressful time full of tough decisions and harsh realities. Many people don’t take proper steps before beginning the mortgage application process. This can result in higher rates, more fees, and can overshadow an otherwise exciting step in a family’s life. Taking a few small steps now to plan for a mortgage later could save you thousands of dollars over the life span of a mortgage. There’s no simple way to guarantee the perfect mortgage rate on the perfect house, but there are a few ways you can plan for success:

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How Does the Federal Interest Rate Increase Affect Buying a Home?

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In December 2015, the Federal Reserve raised interest rates for the first time in a decade. Marking a tentative end to economic aid since the financial crisis of 2008, rates are expected to rise between 0.25 and 0.5 percent. Increases stalled in January after the Fed cited concern over unstable financial markets and global growth, but are still expected to continue their gradual uptick as early as March.

While the news reflects positive U.S. market growth, individuals may feel discouraged in the face of rising rates, particularly where mortgages are concerned. If you plan to buy a home in 2016, you are probably wondering how a federal interest rate increase will affect your bottom line. A few considerations include:

  • Account type. The federal interest rate affects different accounts in different ways. According to The New York Times, “Short-term rates will rise by about one percentage point a year for the next three years, Fed officials predicted. Interest rates on mortgages and other kinds of loans, and on savings accounts and other kinds of investments, are likely to remain low for years to come.” The Fed’s decision to raise rates is a cautious one. While you may see a shift in credit card APR, you won’t see a dramatic increase in mortgage rates right away.
  • Inflation effects. Although mortgage interest won’t rise at the same rate as credit card APR, the effects of the latter could lead to inflation, a factor which could increase mortgage rates significantly over the next few years.
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How Higher Rates Will Affect Your Home-Buying Power

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First-time homeowners and seasoned real estate investors alike often cringe at the idea of all the work and preparation that goes into purchasing a home. Good credit is almost always a requirement for lender consideration, but thanks to a recent increase in interest rates initiated by the Federal Reserve, potential homebuyers will need to be sure they are in good financial standing to qualify for their dream homes. With higher interest rates, competition for mortgages will be steeper and lender requirements even more important.

Federal rate changes have the potential to change how consumers access credit cards, savings accounts and loans of all types, but according to NBC News, homebuyers should not rush into any purchase agreements to take advantage of current rates.

Peter Lazaroff, director of investment research at Plancorp, a financial service firm, advised against hastened decisions, saying, “homeowners should not accelerate or decelerate their purchase decisions based on a market forecast.”

“All markets, including interest rates, are forward looking. That means that debt prices have already built in expectations for slightly tighter monetary policy,” said Lazaroff.

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New Year, New House: Should You Sell?

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The real estate market has seen a steady improvement since the housing crash of 2008. As home values increase, many owners are weighing the benefits of selling. Real estate can have a polarizing effect on your credit: a wise investment can lead to greater profits, more options and financial strength. On the other hand, a poor choice can yield the opposite results. Consider the following points as you move forward in the selling process — they will help you make the right decision.

Before selling your home, don’t forget to:

  1. Create a plan of investment. Selling for selling’s sake may be exciting, but it isn’t the best financial decision. Consider the following example:

Mark and Stella Carson are planning to move across town. They bought their home five years ago for $250,000. A recent uptick in the market means the Carsons can list their home for $289,000. Despite the promise of a profit, the Carsons don’t consider a few key factors:

  • Closing costs. Once you’ve paid off your old mortgage, you’ll still need to pay your agent’s selling commission, usually between 5 and 8 percent of the home’s purchase price. In the Carsons’ case, they pay 6 percent, or $17,340.
  • Moving expenses. Hiring movers sets the Carsons back $1,200. They own several pieces of furniture that are too heavy to carry themselves.
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