Table of Contents
- Refinancing requires a hard credit inquiry, which can lower your credit score a couple of points.
- The negative credit score impacts on a credit score are fairly short term and usually clear up within two years from your credit report.
- The benefits of refinancing can outweigh the temporary dip to your credit score.
- Refinancing can help you secure better loan terms, lower interest rates, and potentially shorten the length of your loan
Who Should Consider Refinancing?
Refinancing, or the process of altering the terms of a loan for a more beneficial credit agreement, might be a great option for lenders who meet certain criteria. You might consider refinancing if you’re hoping to shorten the length of your loan term, lower your interest rate, or even access cash in the case of a cash-out refinance loan.
However, refinancing does affect your credit score as detailed below, and is not available to all lenders. In most cases, you’ll need to have a good amount of equity, a great credit score, and generally positive financial standing to qualify for refinancing.
What Types of Loans Can Be Refinanced?
Not all types of loans can be refinanced, but many mortgages, auto loans, student loans, personal loans, and business loans may be eligible depending on your financial situation. Note that most loans require a credit score of 620 or higher to be considered for refinancing. Your lender may also evaluate your debt-to-income ratio, current equity, loan-to-value ratio, along with other factors on your credit report to determine refinancing eligibility.
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The Credit Impact Of Refinancing
Refinancing any loan can negatively affect credit scores, primarily due to hard inquiries from lenders. Fortunately, this impact is fairly short-lived and does not tend to have long-term consequences on your credit health.
Since refinancing involves taking out a new loan to replace an existing credit agreement, it might look as though you’re taking on more debt, which can also lower your credit score. However, in the long run, refinancing to a lower interest rate or term can outweigh the potential drawbacks.
The Role Of Hard Inquiries
Whenever you’re evaluated for refinancing, lenders perform a hard inquiry on your credit report. This can cause a temporary dip in your credit score and is compounded if you refinance multiple loans in a short timeframe. While refinancing is still worth considering if you’re securing better lending terms, note that more hard inquiries will lead to a greater temporary loss in credibility reflected on your credit report.
Long-term Credit Profile Effects Of Refinancing
Despite initial drops in your credit score, consumer credit tends to recover over time post-refinancing. This is because more of the negative effects of refinancing can be traced back to hard inquiries, which usually fall off your credit report within two years, with the bulk of the impact lessening after one.
Your FICO score which is used by many lenders will be affected in the short term by refinancing, but many borrowers find that the long-term benefits of refinancing outweigh the initial negative impact. Keep in mind that other factors should play into your decision to refinance– for instance, you might not want to refinance your mortgage if you’re nearing maturity or hope to sell your home soon.
Choosing to refinance multiple loans at the same time can also compound the negative impact on your credit, so be sure to consider your individual credit circumstances carefully.
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Frequently Asked Questions (FAQs)
How Long Does A Hard Inquiry From Refinancing Stay On A Credit Report?
Hard inquiries tend to stay on your credit report for about two years. However, after one year, you can expect the effects of refinancing on your credit report to be fairly minimal in regard to your credit score.
Is The Impact Of Refinancing On Credit Scores The Same For All Types Of Loans?
In general, refinancing on any type of loan will affect your credit score due to the hard inquiry required to secure refinancing. However, individual results may vary, as certain loan types like student loans and business loans may take other factors into consideration to determine your creditworthiness.
Can Refinancing More Than One Loan At A Time Have A Compounded Effect On Credit Scores?
It’s generally advisable to refinance one loan at a time to minimize the negative effects on your credit. Refinancing multiple loans at once can compound the loss of points to your credit score, leading to more short-term drawbacks in comparison to refinancing a single loan.
What Credit Score Do You Need To Refinance A Loan?
The credit score you need to qualify for refinancing depends on the type of loan you’re looking to refinance. In most cases, you’ll need a credit score of at least 620 or higher to qualify, though some loan types like personal and business loans, may have a higher lower limit, requiring scores of 640 or higher.
Is It Challenging To Become Approved For A Refinance?
Your odds of getting approved for refinancing weigh heavily on your individual financial health. Lenders consider your credit score, debt-to-income ratio, loan-to-value ratio, equity, and even employment history to determine refinancing eligibility.
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