Refinancing is one of the most common ways people free up their money to add to their savings accounts, but the question that many people ask when considering refinancing is: will this hurt my credit? Before that question can be answered, it’s important to understand what refinancing actually means.
Refinancing is a process in which someone takes their current mortgage or loan and has it replaced with a new one that has either a lower interest rate or a lower monthly payment. It’s important to know that the original loan is not just thrown out, it’s actually paid off by lenders and replaced by the new loan.
In theory, refinancing is a great idea. Borrowers are able to refinance out of a current, high-interest loan into a lower-interest loan, saving thousands in interest charges every year. With mortgage rates dropping, refinancing can often make sense financially for homeowners.
According to mortgagecalculator.org, refinancing can be a good option for obtaining a more manageable monthly payment if those people already have a good credit score. If not, refinancing can actually cause more harm than help. One of the main issues that burrowers face when refinancing is the fees charged for the process, which can sometimes be thousands of dollars in and of themselves.
The other reason refinancing can be such a risky prospect for burrowers is the effect that it can have on their credit scores. One of the main reasons to refinance in the first place is that as someone’s credit score increases, it becomes easier to get loans at lower rates and interests, so if someone’s credit score is poor, refinancing can actually lower their credit even more in the long run.
| Term | Rate | APR |
|---|---|---|
| 30-year fixed | 2.875% | 2.942% |
| 20-year fixed | 2.875% | 2.971% |
| 15-year fixed | 2.375% | 2.497% |
| 10-year fixed | 2.375% | 2.554% |
Before refinancing, it is important for someone to discuss your options with a financial advisor to ensure it is the correct option for you.
