If you bought a home several years ago when your credit wasn’t so good, you probably got a loan with a relatively high interest rate. If your credit has improved since then, refinancing could reduce your monthly payments and possibly save you tens of thousands of dollars in interest.
How Your Credit Score Can Affect Your Loan’s Interest Rate
Mortgage lenders look at several factors when they set interest rates. A borrower’s credit score is one of the most important criteria. Lenders place a lot of emphasis on credit scores because those numbers help them determine how risky it would be to approve a mortgage for a particular individual.
A person with a high credit score makes payments on time and manages credit responsibly. That type of borrower is less risky to a lender than someone with a lower credit score, which is why borrowers with higher credit scores typically qualify for mortgages with lower interest rates.
How a Higher Credit Score Can Help You Save
If you took out a mortgage when you had a significant amount of debt, or if you had gotten behind on some of your payments, those issues were reflected in your credit score, and that in turn affected the interest rate that you got on your home loan. If you have reduced your credit card balances and consistently paid your bills on time since then, your credit score may be higher now than it was then.
Refinancing can allow you to reap the rewards of your financial discipline. Reducing your interest rate by a seemingly small amount can add up to big savings over the life of the loan. That means you’ll be able to pay less each month, put more money toward retirement and other long-term goals, and pay less in total interest, or you might prefer to keep paying the same amount every month so you can pay off your mortgage faster.
Even if your credit score has only gone up by a relatively small amount, refinancing might save you money. Lenders group credit scores into tiers and set rates accordingly. If your credit has improved enough to bump you up to a higher tier, you might qualify for a better interest rate.
Explore Your Options
Shop around and get quotes from several lenders. Each uses its own guidelines to assess refinance applications and set interest rates. Look at all the terms, including closing costs, to figure out which lender is the offering the best deal.
Think about how long you intend to stay in your house to figure out if refinancing would actually save you money. Also, find out if your current mortgage has a prepayment penalty. If it does, that will reduce your potential savings from refinancing.
