How Does Refinancing Affect Your Credit Score?
You've probably heard something about refinancing at some point during your journey with credit. Refinancing is something that can be beneficial to you if you do it the right way. You'll have to have patience and perseverance when you choose to refinance, and you also have to go to the right people for help. The following is some information about the process of refinancing, how it can benefit you, and what to expect.
How Refinancing Affects My Credit Score?
The piece will answer this question, as well as many other questions that you might have about the process. Our goal is to help you understand so that you'll know if it's the right thing for you to do by the time you finish reading this article.
What Does Refinancing Mean?
The term "refinance" is a relatively easy term to understand. Its clear-cut definition is to "finance again." That's what you do when you choose to refinance something. You apply for a new loan with better terms than the one you got with the original lender. In some rare cases, the same company refinances the original loan, but in most cases, it's a completely different establishment. How it plays out depends on the company that is financing your product.
What Can a Consumer Refinance?
As a consumer, you have the right to request refinancing on some of your most crucial accounts. Usually, the term "refinancing" refers to an automotive or home loan, though other loans can be refinanced. The auto and home loans are the two most commonly refinanced agreements of them all. However, it's possible to refinance a personal loan or an installment loan that doesn't have anything to do with your car or home.
Can You Refinance A Personal Loan from the Same Lender?
When a lender decides to refinance a loan for you, it decides to take on your debt. This company will pay off your existing loan and then charge you for the loan with them. Their loan will have a different monthly payment amount and interest rate from what you had before. Hopefully, it will be much better than the situation you had before.
Top Reasons People Refinance
The number one reason that people refinance their loans is because of a horrible initial interest rate. Sometimes car and mortgage loans can be brutal on the interest, especially if a consumer's credit has a shaky past. Some lenders charge their customers outrageous interest rates to ensure that they get their money's worth for helping the individual. The consumers take the deals just to get into a car or home that they like, but they never intend to keep the high-interest arrangement.
Sometimes, people refinance their cars or homes because it provides them with a lower monthly payment, and they want to use the remaining funds to make some other areas of their lives much better. The extra money can go to the household bills, or it can go toward a vacation or a desirable item.
The second reason that people refinance sometimes is to get cash back. Certain types of refinancing agreements allow borrowers to take money from any additional funds to help them achieve other life goals they have.
How Refinancing Works
Before you learn the answer to," How does refinancing affect your credit?" we want to explain how the process works. First, you reach out to a prospective refinancing company and let them know what you want to do. You'll have to provide information such as your name, address, and social security number. They will then run a credit check to see if you are eligible for a refinancing deal. If so, you will have even less stress off your head than before.
Should You Refinance?
Refinancing is an excellent idea if you have a super-large interest rate and you want to cut down on the monthly expense. It might work for you if you don't mind dealing with a few situations that look like setbacks in the beginning. Refinancing may be a good idea if you're not happy with your current lender, as well. It might be a smart idea for you to allow another company to help you from this moment on. You can speak with a financial specialist before you make any decisions that may seem hasty to you.
The Benefits of Refinancing
Many benefits can come to you by allowing another company to handle the loan you have right now. One benefit is that you'll get to have a new experience with a different provider that can offer you a glowing recommendation when you need something else. You can also benefit from a refinance deal because it will eliminate the high-interest debt that you have with the other provider. Furthermore, you can benefit from refinancing with a lower interest rate and lower monthly payment. There's a lot of potential for you to do much better in your life, with those two aspects of your loan being much lower now.
How Refinancing Affects Your Credit Score Short-Term
It's important that you understand that refinancing your home or vehicle may have some adverse effects in the beginning. This will occur because of the way the credit system works and how creditors report your accounts to the credit bureaus. Do not be alarmed if you see the following changes appear on your credit report shortly after you begin your refinancing agreement:
A Credit Inquiry
A credit inquiry will show up on your credit report any time you apply for a financial product. A hard credit inquiry is one where the lending company requests your complete credit profile. It will show up on your credit report for two years, whether you get approved for the refinancing agreement or not. That's why it's best to see if you can get prequalified first. A prequalification check doesn't hurt your score. The lender does a "soft pull" and then tells you the probability that will receive approval. It's a good idea not to complete the full application if you don't get a positive answer on the prequalification request.
New Account
You will have a new account if a lender decides to refinance your car or home. A new account can be a good thing, or it can be a bad thing, depending on how many accounts you have on your credit profile and how well you've mixed the account types.
Overlapping Accounts
Your two accounts may overlap for a brief period because your previous lender may not report that your account has been off right away. If that happens, it will look like you owe double the amount that you owe on your house or loan until the original lender updates your credit report information.
Shortened History With Accounts
Anytime you open a brand new account, it automatically shortens your overall length of credit history. The only thing you can do to improve that is to make timely payments on your new account each month and do not close any of your existing accounts.
With all of those changes, you might be wondering, "How does refinancing affect your credit score?" That's a fair question to ask, and we have an honest answer. You might see a temporary drop in your credit score at first while everything is transitioning. Again, do not be alarmed because everything will balance out for the better in the end. It will take time for you to see the positive effects of the refinancing agreement, but we promise that you will see it as long as you take care of your payments in a timely fashion.
How Refinancing Affects Your Credit in the Long-Term
Now you have the answer to, "How does refinancing affect your credit score?" in a short-term sense. Now, let's look at the long term answer to, "How does refinancing affect your credit score?"
More Money Going to the Principal
Your refinanced deal will have a much lower interest rate than your original deal had. That will allow you to pay more money toward your principal each month. Thus, a larger chunk of your overall balance will disappear each month, and your credit score will rise because of it.
Extra Funds For Other Accounts
Because of your lowered payments and interest rate, you will have more disposable income available to do with as you please. That will allow you to double up on some of the payments on your other accounts if you want to. Your doubled payments will reduce the balances on those accounts, and your credit score will rise because of that, as well.
Well-Established Payment History Over Time
Your account history will get better each month that you make a timely payment. Any points that you lost at the beginning of the refinance deal will return to you, and you will surpass what you had before. You will end up with a healthier-looking overall profile over time, and that's what you want. That healthy profile will give you access to more credit and additional options to refinance again later if you feel like you can get an even better deal. Now you know the answer to, "How does refinancing affect your credit?" In the end, it will work out positively for you.
How to Find the Right Refinancing Company
The most important part of the refinancing process is to ensure that you go with a reputable company. Don't sign up with the first company you find because there will be many options out there for you. You can conduct an independent search for the best refinancing company, or you can use a comparison tool. A comparison tool will layout information for you in a way that you can easily understand. Thankfully, we here at Goalry have one! Below you can find out if you qualify for any of the suggested, trustworthy lenders. You should always make sure you are choosing the right option.
Alternatively, you can speak to a seasoned financial advisor who has connections with the leading refinance companies. This person may have access to deals that you can't find on a standard comparison site. No matter which way you go, make sure that you take your time and visit each lender's website to find out more about them before you proceed. You'll be glad you took the time when it's all said and done.
Qualifications for Refinancing
To qualify for loan refinancing, you must meet certain criteria. Your credit score is one of the main qualifying factors. Unfortunately, you have to have fair, good, or excellent credit to get a provider to refinance your deal for you.
Car Refinancing
Auto Refinancing to Help Save More Money
Secondly, your car's value must be more than the amount of money you owe on your auto loan. If it's not, then the lender may ask you to come up with the balance. For example, your car's value is $5,000, but you owe $10,000 on the loan.
A prospective lender is not going to lend you more than the value of the car. Thus, you will have to come up with $5,000 cash before you qualify for lower payments by refinancing your car.
Home Refinancing
On the other hand, you might be able to get your home refinanced in the same situation. This type of refinancing deal is called the HIRO program. The HIRO acronym stands for Home Affordable Refinance Program. In this deal, the lender may approve you for an amount of much more than your home's current value.
Everything You Need to Know About A Mortgage Refinance
The program is similar to the HARP program that expired in 2018. The HARP program allowed borrowers up to 125 percent of their home's value. HIRO offers more for qualified applicants. As with the HARP program, you'll have to meet some qualifications to get approved for this program.
Your payments will have to be current for the past 12 months. Freddie Mac or Fannie Mae must guarantee your loan. Your home's mortgage must have also been advanced on or before May 31, 2009. Currently, this plan has no expiration date. Therefore, you can speak to someone about it if you feel as though you qualify for assistance.
How to Increase Your Chances for Refinancing Approval
As we mentioned before, your credit score needs to be up to par before a lender will consider you for refinancing. You can do a few things to increase the chances of obtaining approval for such a deal. The first thing you need to do is to request a copy of your credit report. You'll want to see everything that's on your report so that you know where you stand. You should pay off any collections accounts and catch up with any accounts that are showing as 30 days past due or more.
Perform a dispute on any accounts that do not belong to you and any accounts that have an incorrect balance. The credit bureau will be obligated to investigate any account that you feel is incorrect or invalid. It must finish its investigation within 30 days. It will go through the process of trying to validate the account. The bureau will remove the account if it can't validate it. At that point, you might see your credit score take a humongous jump for the better.
Stop accumulating debt immediately. Do not use any of your credit cards or other credit accounts as the usage will lower your score. Be sure not to make any credit inquiries until it's time for you to apply for the refinancing deal. Even then, you'll want to conduct a preapproval request first to avoid having a hard inquiry placed on your profile if you have no chance of getting approved for the deal.
Contact Us for Further Guidance
You should now have a vast knowledge of the refinancing process and how it works. Maybe you've even decided that refinancing something of yours is a solid decision. If so, you can contact us to help you find a refinancing company that will be good for you. You can consider us as your personal finance friend. Our main goal is to ensure that all of our clients and visitors are well educated and have full access to professionals who can help them with various financial matters. We can offer you help if you need a refinance deal, personal loan, auto loan, home loan, consolidation advance, or something else.
Know Your Credit. Visit the Creditry Shop NOW!
We are not a lender by any means. However, we work with a network of prominent and reliable lenders to connect you with if you need something. We also have tons of information in our database about managing debt and credit. We can also set you up with someone in the finance industry if you need assistance with getting onto a debt management plan or signing up for some counseling.
We are here for whatever you need, and we are proud to say that we've been here for years. You can speak to one of our helpful advocates by contacting us as soon as possible. You can contact us via a short form or telephone. Tell the agent what you need, and he or she will find the best strategy to get that for you. We'll start your journey to financial health right away.