Refinancing Your Personal Loan In The Right Situation Can Be A Great Way To Pay Off Your Debt And Save Money
Saving money by refinancing high-interest debt into lower-interest debt is often one of the main reasons people get personal loans in the first place. But if youd like to get a lower interest rate for an existing debt, it may make sense to refinance your personal loan.
In the second quarter of 2022, the average debt per borrower for unsecured loans was $10,344, according to TransUnions Industry Insights Report. In some situations, which well explore below, refinancing a personal loan might make sense for you.
Special Shopping Period For Mortgages
When you are shopping for a new mortgage, FICO will ignore any mortgage-related inquiries that are less than 30 days old. They will not count against you. For mortgage inquiries that are more than 30 days old, they can be treated like a single inquiry if several take place within a few weeks.
For instance, if you are shopping for a refinance in a 30 day period, you could have several credit pulls from several lenders. But they only count as a single credit hit because the bureaus know that people often need to check with several lenders when refinancing. And, credit bureaus actually want to encourage you to shop for a mortgage, so they treat this situation as just one hard credit inquiry.
This of course differs from shopping for several credit cards in a short time. This can hurt your score because you are applying for different loan products with different credit card issuers.
Even if you are shopping for a refinance with several lenders, if it is for the same reason, you should not have your credit hit more than a single time.
But note this shopping period can be only 14 days for older FICO versions compared to 45 days for newer versions. And keep in mind if you space out refinance apps too much, you may have more than one hard inquiry on your credit report. It should not be too damaging though, and should not keep you from looking at different lenders.
Does Refinancing A Loan Affect Credit Scores
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Refinancing a loan can help you save money. You can spend less on your monthly payments and you can even reduce the total amount of interest youll pay in some cases. Those reasons alone are enough to convince most people to pull the trigger. But what about your credit score? Does refinancing affect your credit negatively?
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Can I Refinance Immediately After Closing
In some cases, you may be able to. In others, you may be required to wait from six to 24 months, depending on the lender, before you’re eligible to refinance. Refinancing is typically done to receive a better term or interest rate so it would also be unlikely that you would close with one lender only to immediately refinance with another that would give better terms.
How Does Refinancing Impact Your Credit Score
While refinancing can help you save your hard-earned cash, the unintended drawback is that it can hurt your credit rating. It is important to keep in mind, though, that if refinancing is properly executed, the drop is merely temporary and your score should recover. Here are some common ways refinancing may cause your credit score to dip:
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How To Make Smart Decisions Before Applying For A Refinance
Before applying for a refinance, consider checking your credit report with the major credit bureaus. This way, if you find any mistakes on your credit report, youll have time to address them.
Also be careful to not close old accounts or open new ones without consulting your mortgage professional first.
Refinancing your mortgage is a major decision. There are plenty of factors to consider, including the amount your monthly payment will change, fees youll incur for the refinance and the impact on your credit score.
Make the best choice for your situation by evaluating the big picture, instead of focusing solely on lowering your current interest rate.
Where Are Mortgage Rates Headed
The days of sub-3 percent mortgage interest on the 30-year fixed are behind us, and rates have so far risen beyond 7 percent in 2022.
“Low interest rates were the medicine for economic recovery following the financial crisis, but it was a slow recovery so rates never went up very far,” says McBride. “The rebound in the economy, and especially inflation, in the late pandemic stages has been very pronounced, and we now have a backdrop of mortgage rates rising at the fastest pace in decades.”
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When To Refinance A Personal Loan
As with other types of loans, its best to refinance a personal loan if your credit score has improved since the original loan was processed and youre likely to qualify for a better interest rate. Refinancing also may be an appropriate strategy if you need to lower your monthly debt service or want to consolidate several personal loans into one lower interest loan. These are a few scenarios where refinancing a personal loan may make sense:
- Your credit score has increased since the loan was originally issued
- You have a variable annual percentage rate and want to refinance into a fixed-rate loan
- Your income decreased and you need to lower your monthly debt service
- You want to avoid an upcoming balloon payment
- Youre comfortable paying the lenders application and origination fees
- You want to pay off your loan sooner by refinancing into a loan with a shorter term
If youre planning to refinance a personal loan or other debt in the near future, take steps to build your credit so youre more likely to qualify for a competitive interest rate.
How Lenders Evaluate Auto Loan Refinance Applications
Fortunately, getting pre-qualified for auto loan refinancing does not impact your credit. It only requires a soft credit pull, or soft credit inquiry, so it wont ding your credit score. This is a great first step for anyone who is interested in refinancing but wants to get an idea of the types of offers that may be available to them.
Once you complete and submit your application, lenders will assess your creditworthiness. Generally, theyll look at the following to make a decision:
If you dont quite fit all of the criteria above, dont sweat it. Every financial institution is different, and there could still be a lender willing to work with your credit profile, even if you have a lower credit score.
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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.
When Should I Refinance My Mortgage
There are a lot of factors to think through when Consider market trends , as well as your personal financial health . Its a good idea to use a mortgage refinance calculator to figure out your break-even point after accounting for refinancing expenses.
You also need to know how refinancing differs from other mortgage options like loan modification and second mortgages. The major difference between a refinance and a loan modification is that refinancing gives you a new mortgage while modification changes your current terms.
The new mortgage you get from refinancing replaces the existing one, an important distinction between getting a second mortgage and refinancing. Review what works best for you before deciding what to do.
Its important to note that a modification should only be considered if you cant qualify for a refinance and you need long-term payment relief. Modification typically has a major negative impact on your credit score.
If youre interested in lowering your monthly payment, a mortgage recast is a straightforward option. It involves making a significant lump-sum payment on your principal so your lender can reamortize the balance.
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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.
Refinance Benefits Outweigh Temporary Credit Score Ding
An auto loan refinance isnt bad for your credit after all. While your score could drop a few points temporarily, you could enjoy lower car payments while taking advantage of falling market rates. Remember to do your rate shopping within the right time frame to avoid additional hard credit checks.
Dont let a temporary, small hit on your credit score scare you from refinancing your car loan. Rate shopping, reviewing your credit, and getting prequalified can minimize any negative impact refinancing might have on your credit score.
Ready to refinance your car loan?
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When It Is Advisable To Refinance Your Mortgage
It is worth noting that refinancing a mortgage is not always about getting the lower rate. You can also use this strategy to better manage your finances. Here are some instances when refinancing your home loan makes sense:
- Your current rate is no longer competitive and lower deals are available.
- Your propertys value has increased, and you want to access your equity.
- Your financial or personal situation has changed.
- Your credit card debts have started accumulating and you want to consolidate them.
Tapping Your Home Equity Could Negatively Affect Your Score
If youve built up equity in your home, you might want to tap into it to complete some much-needed repairs or tackle a large-scale renovation. But by getting a home equity loan or a home equity line of credit, youll be increasing your debt load.
Thirty percent of your FICO credit score depends on how much debt you owe. If you take on more debt, youll increase your credit utilization ratio. Having a high debt-to-credit ratio can hurt your credit score and make you look like a risky borrower.
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What Do Todays Mortgage Refinance Rates Mean For You
With mortgage interest rates significantly higher than they have been over the past few years, a refinance is not a good idea for most homeowners right now. However, some may still be able to lock in and benefit from a lower rate.
If the rate on your current loan is above 6.49%, you may want to consider a mortgage refinance, as long as you can reduce that rate by at least 0.50% or more.
For example, if you have an outstanding balance of $300,000 on a 30-year loan and you qualify to reduce your current rate from 7% to 6.50%, youll reduce your monthly mortgage payment by $100 a month or $1,200 per year. If you can qualify for a 6% rate, youll save $197 per month. To take full advantage of the potential savings, make sure you stay in the home long enough to break even and recover the cost of the refi.
The example above assumes you are doing a rate and term refinance into another 30-year fixed-rate mortgage. But, if your finances have improved significantly, you also have the option of refinancing into a shorter-term loan like a 15-year fixed-rate mortgage, which typically has a lower interest rate.
A shorter-term mortgage loan means you will pay off the loan faster and save on interest, but the trade-off is that your monthly payments will be higher.
Check Your Own Credit Before You Apply
Before applying for a refinance, its a good idea to pull your credit to check whether youd qualify for a new loan. This creates a soft inquiry, which wont impact your credit.
The minimum credit score you need depends on the mortgage program and your loan-to-value ratio, debt-to-income ratio, and cash reserves.
If your credit scores need work, consider hitting the pause button on your mortgage applications. You can work on improving your credit and applying for a refinance loan after a few months.
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What Are Todays Mortgage Refinance Rates
The average rate on a 30-year fixed-rate mortgage loan is 6.49%, according to Freddie Mac. Historically speaking, mortgage rates are still lower than the long-term average. The rate average for a 30-year fixed-rate mortgage over the last 50 years is slightly under 8%. In general, rates charged on a refi loan tend to be a bit higher than rates on a purchase loan.
However, compared to last year, when rates reached a record low of 2.65%, todays mortgage rates are considerably higher.
Mortgage rates have been rising at a stunningly fast pace this year, more than doubling during the first nine months of the year. The rapid increase is a result of the Federal Reserve increasing the federal funds rate l to fight high inflation. As the fed funds rate moves higher, rates on all kinds of debt, from personal and student loans to credit cards and mortgages, increase as well.
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Is Refinancing A Mortgage A Good Idea
Refinancing a mortgage can help lower your monthly payments, which may be your largest expenditure each month. That can free up your budget month after month.
If your refinancing moves you from an FHA-backed loan to a conventional loan, you might also get to drop your mortgage insurance premiums. That can lower your monthly payments too.
But hereâs another big factor: when you refinance, youâll probably incur closing costs, like origination fees or paying for a new appraisal. Fees and costs like these that commonly come with a refinanced mortgage can range between 2% to 6% of the total loan amount.
A mortgage refinance also involves extending the terms of your loan, so your monthly payments will go down, but you may pay more in interest over the long run.