With home mortgage interest rates at a historic low, this might be a great time to refinance your home. Before rushing down to the bank to pick up an application however, it might be wise to check out your credit score first to determine if a little improvement is in order. It’s your credit score that will impact refinancing your home both in how much you will qualify for AND the interest you will be charged.
According to the experts, a credit score of 740 and higher means that you will be eligible for the lowest interest rates possible on a refinance. Below this number, you could find yourself paying higher interest rates by as much as 1.5% more. And what if your FICO score is below 620? Lenders are so skittish these days that you might as will forget refinancing unless you are prepared to do some serious credit repair in the months ahead.
Before refinancing your home, it’s a good idea to order a copy of your credit score six months before you refinance. This gives you ample time to fix mistakes on the report and see how your present credit score stands. If the score is low, here’s some tips for improving your credit score before financing your home:
Tip #1. Stop maxing out the credit cards. A good rule of thumb is to keep credit card balances beneath 35% of the total credit available line. In plain English, on a card with a $10,000 credit limit, don’t charge more than $3500. If a few of your cards are over that 35% margin, accelerate those payments to bring down the balances within the acceptable range.
Tip #2. Lower your overall debt. Just as lenders don’t like to see those credit card maxed out, nor do they want to see lots of outstanding debt either. How much you owe in relation to your income has a serious impact in determining a credit score. Making an effort to lowering that debt will improve that score.
Tip #3. Don’t open up multiple new accounts prior to the refinance. A flurry of new credit cards prior to a refinance sends a red flag to the lender that you may be overextended or plan on incurring new debt once the refinance is approved. Avoid the temptation to open up new credit lines, no matter how tempting the offer.
Tip #4. Don’t cancel unused cards in good standing. The length of your credit history also factors into your credit rating. Instead of cutting up and tossing those old unused credit cards, from a scoring standpoint it’s best to keep them active.
Tip #5. Be diligent in making credit card payments on time. Timely payments both on your credit cards, store accounts, car payments, and existing home mortgage demonstrate that you can be trusted to pay back a refinance. Your payment history is so important that it rates as the most important component of determining a credit score.
If you are looking to refinance your home in the months head, improving your credit should begin now. Timely payments, reducing your debt load, and avoiding the temptation to max out your credit cards will improve your credit score and make a difference in qualifying for a home refinance with the best terms possible.