Mortgage refinancing can affect your FICO creditworthiness in several different ways, according to credit bureaus, finance companies that produce known creditworthiness assessments. Can refinancing hurt your credit?
What is refinancing?
Refinancing means repaying your current loan with a new one. People usually decide to refinance in exchange for a loan with better rates, which will lower their monthly payments and allow them to save money on interest and fees over time. Many types of loans have refinancing options, including mortgages, car loans, student loans and personal loans.
Too much mortgage refinancing is not good
Refinancing can become problematic for your creditworthiness if you are constantly refinancing or applying for a new mortgage loan. FICO may punish you for failing to comply with the loan agreement or for too many inquiries in the credit report. In addition, every time you refinance, your credit rating is lowered, and too many requests for credit ratings in a relatively short time often have a negative impact on your creditworthiness.
Does refinancing a car harm your credit?
Refinancing your car will temporarily lower your creditworthiness because the lender will carry out a hard credit check, but this should not drastically harm your credit point or damage it in the long run.
To understand how refinancing will affect your creditworthiness, let’s look at how creditworthiness assessments are calculated. Most major credit assessment models include five types of information when calculating results. For example, FICO uses these categories:
- Payment History (35%)
- Amounts due (30%)
- Length of credit history (15%)
- New loan (10%)
- Credit mix (10%)
Some common advantages of refinancing include:
- Lower interest rate hedge
- Lowering monthly payments
- Save money on interest due to shorter repayment periods
- Consolidation of many loans
- Change in the type of loan (i.e. a loan with a variable interest rate for a loan with a fixed interest rate)
But not all of these benefits will apply in every case and it is important to balance them with disadvantages.
Disadvantages of refinancing
Some of the potential disadvantages of refinancing include:
- Increasing the total amount paid with longer repayment periods
- Early repayment fees and penalties related to larger loans
- Higher interest rates
- Loss of flexible repayment options and other benefits
- Decrease in creditworthiness
If you want to refinance one or more loans, talk to a financial advisor and be informed about exactly what refinancing will do for your financial condition, especially your creditworthiness.