Refinancing can often be a great move for homeowners who want to change their current mortgage, whether it’s to shorten their loan term or to get a better interest rate. However, before sending an application form to a lender for a replacement home loan, it can often be a wise idea to take your credit score into consideration.
Why is your credit score important?
Generally, your credit score can play an important role in your refinance – which may be a bit of an issue for those with a lower score. Often, a lender will take your credit score into consideration when deciding whether or not to give you a refinance.
Usually, those with a good score have nothing to worry about, but lower credit could cause a bit of a problem. In most cases, lenders require borrowers to have a credit score of at least 620 before they’ll consider approving an application.
However in most cases, this isn’t the only reason why having a high score can be important to your replacement home loan – and even if you do have a score of 620, you may want to consider improving your credit and waiting a little longer to apply. If you have a lower score than this, you may not even have the opportunity to replace your current mortgage.
Fortunately, there are often quite a few things that you can do to improve your score, such as paying off debts or keeping on top of your bills. While it may sometimes take a while to get your credit score high enough, especially if you’ve let it drop particularly low, it’s often an accomplishable goal.
Generally, FDA (Federal Housing Association) programs will offer refinance options for those with lower credit scores, so you may want to consider this option if you really want to refinance your home. Often, if you’re replacing a non Federal Housing Administration home loan with an FHA mortgage, the minimum score required will be 580.
How your score can affect your interest
If you’ll be able to get a replacement home loan, your lender will use your credit score to determine how much interest you should pay on your new mortgage, with higher scores often getting the lowest rates.
If your credit score has dropped since the time when you first applied for your loan, it may be a better idea to stick with your current mortgage, as you might end up paying higher rates – and this can (and often will) lead to higher monthly repayments.
What score do you need for a good interest rate?
Often, the better interest rates are reserved for those who have a good credit score; but how high a score do you need to get low interest? In most cases, homeowners with over 740 on their credit are likely to get a good interest rate on their new home loan – so if your score is this high, refinancing may not be a bad idea.
Is refinancing worth it?
If you have bad credit, you may be wondering if replacing your current loan is really worth it – and in some cases, it might just end up costing you more to do so.
Aside from the fact that you could end up having higher payments to deal with if your score has declined over the years, the fees that can come with refinancing could make things even more difficult for you, too.
From the closing fees to the appraisal costs, there are often several different payments you’ll be required to make if you want to refinance – and since they can often come to thousands of dollars all together, you may find that sticking to your existing mortgage makes more financial sense.
While refinancing can often come with a number of benefits for those with good credit, they can often act as the opposite for those with low scores.