Refinancing a mortgage is the action of taking out a new loan to replace the first loan you took to purchase your home. It is a relatively common operation, but it can affect personal finances.
This article will assess whether mortgage refinancing can harm your credit history.
What is mortgage refinancing?
It is a financial operation in which we request a mortgage loan that replaces the first mortgage requested. Refinancing can be done for different reasons, from improving the conditions of the first mortgage to solving debt problems by unifying all debts in a single credit.
It must be taken into account that this last action, the reunification of debt on a mortgage, can be controversial, and is in fact, as we will see below, a potential origin of major problems regarding your credit history.
How does mortgage refinancing hurt you?
When refinancing a mortgage, some steps are common to any credit application, but other steps are unique to this type of financing.
For starters, you have to keep in mind that, effectively, it is a credit application. That is, you will have to pass certain filters and credit checks. Think that, right from the start, the larger the amount of money you have on credit, the more your credit score is reduced. That is important in the development we mentioned before. When we do a refinancing with the purpose of reunifying debt, we usually ask for more money than we need to mortgage. In this way, the credit score is affected.
Credit bureaus pay close attention to credit and loan application movements. Generally, if you apply for a certain number of credit inquiries in the same week, you will be considered for making a comparison. Comparisons will not affect your credit score. However, if the examinations happen over several months, alarm bells may ring. And in case the loans are granted, the credit score will immediately decrease.
On the other hand, assessing the implication of credit accumulation is also important. When refinancing is not motivated by an improvement in conditions, which would be the ideal model, it is necessary to keep track of the other financing products we handle. And in this case, a common mistake is to not take credit cards into account.
The credit score also correlates to the use of the credit card; moreover, you may not have more loans than the mortgage if you have high credit debt. Refinancing will probably reduce your credit even more.
Key Steps Before a Mortgage Refinance
There are some very important steps you should always keep in mind before applying for a mortgage refinance. Most of these steps can be done by yourself, i.e., they are relatively simple actions. In other cases, when it comes to bureaucratic queries, you may have to resort to brokers with intermediaries, although this is not very common.
The first step, always, is to assess the real need for refinancing. It may be a good idea when refinancing is intended to improve loan terms and lower costs. Refinancing as a last resort to save you from financial debt can be a very bad idea. This assessment is the initial key before any loan.
The second key element is to assess your credit history. It is possible to check your credit history at the credit bureau itself, an option that many people are unaware of, but you can also access your credit report weekly at AnnualCreditReport.com. In this step, it is important to eliminate errors or unnecessary insertion in delinquency lists, etc. Be careful; as this is important information: a mistake in this type of list can be very damaging to your credit.
The next step, which is also very important, is to adjust the amount that needs to be requested and make a comparison as wide as possible. Nowadays, we can make these comparisons through tools available on the Internet. Another option, also widely used, is to go to intermediary agencies that can propose a large number of customized options. However, we generally have to pay a management fee in the latter case.
When determining the mortgage that’s most convenient for our refinancing, we have to follow the usual contracting steps. Remember that it will be much easier to refinance a mortgage that has already been amortized to a large extent than a mortgage with a long amortization period left.
The perfect summary would be to consider all the factors mentioned above and, above all, to value that it is a very important financial operation. Never done in vain, mortgages are one of the most complicated financial operations we carry out throughout our lives, in terms of amount and duration.