A refinance is the process of obtaining a new loan to pay off existing debt. Refinancing can come in handy when you want more flexibility or better terms for your mortgage, car loan, or other consumer debt. For example, refinancing a mortgage might help you access a lower interest rate and save money on monthly payments.
It’s critical to understand how building up more credit cards, and other installment debt could hurt your overall financial health. Want to know if you should refinance your debt? Visit finanza. We’ll help.
What Is Refinancing?
Refinancing is simply applying for a new loan to pay off existing loans, but is it smart? This means you would refinance your car loan, mortgage, student loan, and more and consolidate them into one product and one payment. You can even lower your interest rate and save money over time!
Debt refinancing is a smart financial move that can enable you to pay off your existing loans and credit cards with a single loan. This can be an effective strategy if your credit score has improved since you took out the first loan or if consolidating your debts would free up cash. However, it’s important to remember that refinancing will increase your total debt, as well as the fees you pay over the life of the loan.
Debt refinancing strategies could negatively impact your credit score
Three ways refinancing a loan can lower your credit score:
- Hard inquiries on your report
Credit score impact is usually severe when a hard inquiry is involved than with a soft inquiry. A hard search occurs when lenders you’re not currently doing business with doing a credit check on you. These inquiries appear on your report for two years and can lower your score by up to 5 points in some scoring models.
The good news is that many lenders don’t run hard inquiries if you apply for a pre-qualification or pre-approval. You’ll still receive an instant decision on your application without the same kind of impact that a hard inquiry would have on your credit score. However, if you’re unsure whether a lender will run a hard inquiry, it’s best to avoid them!
- Having too many loans on your reports
The hard inquiry from a lender can hurt your credit score by lowering your average age of accounts and increasing your overall credit utilization. To avoid this, make sure you apply through multiple lenders within a 14- 45-day window. This will ensure that each inquiry is counted as a single, unanswered inquiry.
- Closing a new loan can result in a drop in your credit score for a short period
Your credit score can take a temporary hit if you’re closing an existing loan. If the account is closing due to payoff or cancellation, it will reflect on your credit report as “closed at request of consumer.” The effect of closing an account depends on the size and age of the account. In general, accounts infrequently closed within the past year will have less impact than those closed in the last couple of years.
When is the best time to refinance?
The best time to refinance your loan depends on your financial situation and the particular loan terms. The ideal time to refinance a loan can vary. Still, it often makes sense to refinance if you have a good credit score, the value of your home has increased substantially, or if interest rates are low enough for this to be a feasible financial decision.