How does Refinancing Affect your Credit Rating?
Who is Eligible for a Refinancing Operation?
Currently, refinancing a loan is a valid and practical option for homeowners in California and the rest of the country. Citizens with a current mortgage for a property they bought in recent years are perfectly eligible to request a refinancing operation
What does Refinancing a Current Mortgage do?
Refinancing a mortgage means resetting the debt to the starting point. Borrowers analyze with a lender how much money they continue to owe on their mortgage. The new lender pays off this remaining amount to the original lender and organizes a repayment plan with the borrower.
What Quantities can a Client Refinance for?
Clients have full flexibility for how much they want to refinance their current mortgage. This means they can refinance the original amount or change it to a higher or lower than the original amount.
A recent study published in Freddie Mac obtained refinancing operations in the last 27 years (1994 - 2020) revealed the following results when analyzing the different amounts clients usually refinance their original loans for:
39% of clients refinanced their mortgage for a higher amount they originally signed with their original lender. This does not mean their house’s price has gone up. It simply means owing a higher amount to the new lender. The benefits of increasing your loan amount (detailed further below) mean having an increase in disposable cash to pay off pending student loans, credit card debt, or invest in a home improvement project.
59% of clients refinance their mortgage for a similar or equal amount they originally signed with their lender. This means owing the same amount but obtaining a more competitive payment term. This happens for example when interest rates drop considerably and clients can refinance their loan with a new and lower interest rate. It provides with a lower monthly mortgage bill saving them money in the mid-term.
A reduced number of citizens (2%) refinance their mortgage for a lower amount they originally signed for. This occurs when they are well into their mortgage repayments. They have paid a substantial portion of the loan but they would like to re-organize their payment plan to a new one because it benefits them more. Clients can choose to either prolong their payment terms or obtain a lower interest rate (either way reaching a lower monthly payment agreement).
What Advantages does Refinancing Offer?
Refinancing in layman’s terms means a borrower transfers their debt from their original lender to a new lender. Their debt does not disappear but refinancing it offers some interesting advantages. Below we list the most important ones with a clear explanation of each:
Influx of cash
One of the key advantages refinancing offers to borrowers is the chance to obtain an increase in disposable cash. Suppose you owe $ 200,000 on your current mortgage and need some extra cash for a home improvement or to pay off a pending student loan or credit debt. If you refinance your current mortgage for $220,000 you can use the extra $20,000 for any home improvements or pay off your pending debts and continue to pay the $220,000 in monthly installments.
Reduced interest rates
Currently, interest rates are record low. If you signed your current mortgages in the past with higher interest rates, by refinancing, you can actually reduce your interest rates and in this manner reduce your monthly mortgage bills.
More flexible payment terms
If for example, you initially signed a 20-year mortgage with your original lender but would like to prolong your payment terms, refinancing can help. This way, you reduce your monthly payments. By doing this, you end up reducing your monthly mortgage costs which in turn helps you save money each month or have to access some extra disposable cash for any personal project such as home decoration or a family vacation.
Can Refinancing Affect you Negatively?
As seen above, refinancing can be highly beneficial. Nevertheless, Many borrowers (rightfully so) worry if it will have a negative impact on their credit score. The answer is a yes but also a no.
Being honest, paying off a debt with a new debt can harm your credit score. Nevertheless, rest assured, this impact is only temporary. Provided you pay your monthly bills on time and without any issues, your credit score should gradually recover to its previous number.
Your credit score is influenced by the amount of debt you owe, but it is also affected by your payment history. If you provide a positive record in payments of your refinance operations, this plays in your favor rebooting your credit reputation.
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