Refinancing Your Auto Loan
Refinancing a car loan may be worthwhile if interest rates have dropped or your credit score has improved since you took out the loan. You might also want to refinance your car loan if you simply need to reduce your monthly expenses.
Refinancing for a longer-term auto loan will lower your monthly payments, but depending on how long you stretch out the loan, it could increase the total amount you pay for the car. Make sure that the new interest rate is low enough that it doesn’t drastically increase your total cost. To refinance, you’ll need a car that has held its value generally, the car must be worth more than what you still owe on it for lenders to consider refinancing.
Cash Out Refinance Means More Debt Possibly A Lower Credit Score
- A cash out refinance could hurt even more
- Because youre taking on more debt as a result
- And larger amounts of outstanding debt
- Along with higher monthly payments can make you a riskier borrower
Also consider the impact of a refinance that results in a larger loan balance, such as a cash-out refinance.
For example, if your current loan balance is $350,000, and you take out an additional $50,000, youve now got $400,000 in outstanding debt.
The larger loan balance will increase your credit utilization, and it could result in a higher monthly payment, both of which could push your credit score lower.
In short, the more credit youve got outstanding, the greater risk you present to creditors, even if you never actually miss a monthly payment.
In summary, a refinance should have a compelling enough reason behind it to eclipse any credit score concerns, so focus on why youre refinancing your mortgage first before worrying about your credit score.
Ultimately, Id put it on the no-worry shelf because chances are the refinance wont lower your credit score much, if at all. And score drops related to new credit typically reverse very quickly.
So even if your credit score fell 20 points, it would probably gain those points back within a few months as long as you made on-time payments on the new loan.
And most people are only concerned about their credit scores right before applying for a mortgage, so what happens shortly after your home loan funds may not matter much to you.
Expert Insight On Mortgage Refinancing
To help answer all your questions, MoneyGeek spoke with industry leaders on refinancing and home lending. This panel will help you identify what to look for, when you should consider refinancing and how to avoid scams in the process.
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Late Or Missed Payments
When youre in the process of refinancing and replacing one mortgage with another, it can be hard to keep track of how much longer you need to keep making payments on your old mortgage and when to start making payments on the new one. That confusion can result in delinquent payments, which usually affect your credit score. Regular communication with your lender can help you stay on top of when your payments are due.
Understanding The Refinance: How It Works
A refinance is a loan that replaces your current mortgage with new terms, a new interest rate or a different loan balance. Refinancing means that you first pay off your old loan with your new loan, then make payments on your new loan.
There are a number of reasons why you might want to refinance your mortgage loan. You can:
- Change your loan terms. Are you having trouble making your monthly mortgage payments? You can refinance your loan to a longer term, which gives you more time to pay back what you owe while lowering your monthly payments. You can also refinance to a shorter term if you want to pay off your loan faster. You may also be able to refinance to a lower interest rate to save money over the life of your loan.
- Remove mortgage insurance. Do you have an FHA loan? If so, you may already be aware that you must pay a Mortgage Insurance Premium for as long as you have your FHA loan, if you put less than 10% down on the home. Many homeowners hold their FHA loans only until they reach 20% equity, then refinance to a conventional loan. This allows them to forgo the mortgage insurance requirement and save money.
- Take cash out of your property. A cash-out refinance allows you to accept a loan with a higher principal balance than you owe and take the rest out in cash. The cash you get from a cash-out refinance can help you pay off debt, cover home repair costs and more.
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Compare Offers From Multiple Lenders
The best way to save money on your refinance is by submitting applications with multiple lenders and comparing offers. Credible can help you with this.
The key is to time it right. Credit-scoring companies know consumers shop around, so multiple inquiries within a certain time frame might have a minimal impact on your score.
FICO, for example, considers all mortgage applications within a 45-day window as just one inquiry. Consider submitting all your mortgage applications within this window to limit the hit to your credit.
What Are The Benefits Of Refinancing
There are many benefits to refinancing, but they will vary based on your current situation and financial goals. Typically, the number one benefit is saving money, but there are many others as well.
For instance, with a refinance you can potentially get a better interest rate, lower your monthly payments, shorten the length of your loan, build equity faster, consolidate other existing debts by combining them all into a new mortgage, get rid of your mortgage insurance or even remove a person from the mortgage.
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Its Totally Fine To Shop Around For A Mortgage
- You should definitely shop around for your home loan
- This ensures you explore all options and obtain the lowest rate possible
- Fortunately FICO has an algorithm designed specifically for mortgage inquiries
- Doesnt penalize mortgage shopping in a specified window of time
The developers of the FICO score know how mortgage shopping works and have adjusted their super secret algorithm accordingly.
First off, FICO ignores any mortgage inquiries made in the 30-day window prior to scoring, meaning those recent credit pulls shouldnt adversely affect your credit scores.
For example, if mortgage lender A pulls your credit, then you decide to get quotes and/or pre-approved with mortgage lenders B and C in the same week, they wouldnt count against you.
This allows to you shop without worry of your credit scores going down each time you do.
Additionally, FICO counts multiple mortgage inquiries in a certain time span as a single inquiry.
Does Refinancing Your Mortgage Hurt Your Credit Here’s The Truth
A mortgage refinance creates hard inquiries, shortens your credit history, and may increase your debt load. These factors can temporarily lower your credit scores.
Edited byChris JenningsUpdated August 11, 2021
Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”
If youre a homeowner, refinancing can give you a chance to save money with a lower interest rate, cash in on your home equity, or adjust your loan terms. But the drawback is that your credit score could drop in the process. The good news, though, is that your credit can bounce back.
Heres what to know about how mortgage refinancing affects your credit and how to protect your finances in the process:
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Is It Ever A Bad Idea To Avoid Refinancing A Loan
There are two situations where you may not want to refinance. Its important to remember that everyones financial situation is unique, what works for one person may not work for another. Be sure to exercise judgment as a part of your decision-making process, foregoing something small now for an immense benefit in the future could be worth the risk.
Upcoming New Loan
If you are applying for a new loan, in addition to the current one you have that youd like to refinance, you should think twice before refinancing your current loan. You dont want to put your new loan at risk for a higher interest rate or even getting denied in exchange for refinancing your current loan. This doesnt mean you cant refinance at all, just hold off until you get your new loan and then move forward with refinancing.
Need to know how to refinance a second mortgage? for the answer.
Also, if you are planning to refinance multiple loans, make sure to refinance the loan that will give you the most benefits first. For example, you should refinance your mortgage before your car loan because you will get much more out of it. From there, you can work your way down your list of loans.
Poor Refinancing Offers
Before moving forward with a refinancing option, deep dive into the offers youve been given to determine if theyll really make you better off or not. Its likely that youll get a lower interest rate or monthly payment, but be sure to consider what the tradeoff is.
Healthy Credit Habits Are Way More Important Than A Few Mortgage Inquiries
I personally think FICO should expand their shopping period across all versions and make it 100% clear that prospective buyers and existing homeowners wont be punished for rate shopping.
However, keeping outstanding credit balances low and paying bills on time is far more important than worrying about a few mortgage inquiries.
And your main concern should be securing the best possible mortgage, not fretting about a few points on your credit score.
To avoid unwanted surprises, know all three of your FICO scores before you begin shopping for a mortgage.
Pulling your own credit will not lower your score because youre not applying for new credit, even if you see an inquiry on your credit report. Its only visible to you.
As noted, a buffer above what is absolutely necessary can be helpful in the event your scores do take a small hit.
One final note Do not apply for any other form of credit before or during the mortgage shopping process.
Doing so can definitely drag down your credit scores, potentially knocking you out of the running for that mortgage. And may increase your debt-to-income ratio if it involves a new purchase!
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Refinancing May Be Worth It
So, is refinancing a car bad for your credit? It may drop your score a few points, but as long as you make your monthly payments on time, your score should recover quickly. More importantly, refinancing can save you money and/or lower your monthly payments.
Unless youre planning to take out a large new loan in the very near futurefor example, a mortgagedont let a short-term, small drop in your credit score keep you from refinancing your auto loan and saving money.
If you didnt shop around for your current auto loan, your credit score has improved, or interest rates have decreased since you took out your initial car loan, check to see if you could get a lower interest rate by refinancing your auto loan.
Think youre ready to refinance? Check out our tips for refinancing a car.
If youre just starting the car-buying process and debating leasing vs. buying, check out our blog post on the important factors to consider.
How Your Credit Score Is Made Up
We mentioned above that refinancing can impact two credit scoring factors: the length of your credit history, and the number of soft and hard inquiries on your credit report.
But how big of an impact do those things really have on your score?
To give you a better picture, here are all the components that make up your credit score along with the weight theyre given in FICOs scoring model:
- Payment history Paying bills late or skipping payments can quickly wreck your credit
- Amounts owed This is about credit card balances rather than your overall debt. Keep all card balances below 30% of their credit limits and you should be fine
- Average age of credit accounts The longer the better. But this looks at your current borrowing. So opening a new account or closing an old one makes your history shorter and your score lower
- This is your mix of credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans. You dont need one of each, but a blend of revolving credit and nonrevolving credit boosts your score a bit
- New credit If you apply for lots of new accounts over a short period, youll send up a red flag. But if youre rate shopping for a single new loan like a refinance, and you get all your quotes within 30 days, youll only take one small hit
So those are the factors that FICO look at in order of importance. The two areas impacted by refinancing are lower on the ladder.
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Changes To Loan Balances And Terms
How much your credit score is impacted by changes to loan balances and terms depends on whether your refinanced loan is reported to the credit bureaus. Lenders may report it as the same loan with changes or as an entirely new loan with a new open date.
If your loan from refinancing is reported as a new loan, your credit score could be more prominently affected. This is because a new or recent open date usually means that it is a new credit obligation, therefore influencing the score more than if the terms of the existing loan are simply changed.
A Lower Rate And A Lower Credit Score Temporarily
When we started shopping around for rates on a new mortgage its best to get a few quotes so you know your options we knew that the creditors would check our credit reports. We knew that this would show up as a hard inquiry on our reports, which would likely ding our credit scores by a few points.
We learned that even if a few different creditors pull your reports while youre interest rate shopping, multiple inquiries while rate shopping over a short time frame will usually be lumped together into just one inquiry. That way, the effects on your score are minimized.
After locking in a low rate and signing a fat stack of papers, we were the proud owners of a brand-new mortgage. We traded our 30-year mortgage for a 15-year loan at a much lower interest rate, and successfully slashed the number of years we’ll be making payments. I was ecstatic about the money wed save. But I wasnt quite as excited about what happened to my credit score.
About a month after closing, I noticed that my FICO score dropped more than 30 points. My VantageScore fell 13 points. These two main credit scoring models consider most of the same factors when calculating your credit score but weigh them a bit differently. The things that affect your scores are:
Unfortunately, when you refinance, the information about how much of your previous loan you had paid off doesnt carry over. You also likely will lower your overall age of accounts by replacing an older account with a brand-new one.
Ways To Minimize The Effects On Your Credit
You can take steps to protect your credit during the refinance process:
View interest rate shopping as a sprint, not a marathon: When you shop around for the lowest rates, submit all of your applications within 14 to 45 days so they can be treated as a single credit inquiry. Newer FICO scoring models allow a 30- to 45-day period, but some older FICO scoring methods that are still in use limit the window to 14 days. VantageScore also uses a 14-day window.
Dont plan another large purchase around the same time: If youre planning on buying a new car or financing a large purchase on a credit card, time your purchases around your mortgage refinance. Buying a car or opening a new credit card will result in more hard pulls on your report, which will further drop your credit score. Big balances on your credit card could increase your credit utilization ratio and cause your score to take a hit.
Make sure you know when your first new mortgage payment is due: Refinancing your mortgage can be a lengthy and detailed process. Sometimes your new loan can be sold to a different lender before you even make your first payment. Be clear on when your payment is due and whom to send it to. Missed or late payments can greatly affect your credit score.
Does Refinancing A Mortgage Hurt Your Credit
The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Laws editorial disclosure for more information.
Adding anything new to your credit profile can alter your score a bit, though many of these changes are temporary in nature. Refinancing your mortgage can temporarily lower your score, but how much and for how long depends on a variety of factors. Find out more below about whether refinancing your mortgage will hurt your credit and what you can do to protect your score.
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