Refinancing your home mortgage can improve your overall financial outlook but can have negative impacts on your credit score. Regardless of whether your decision to modify the terms of your loan stems from a need to free up cash to pay other expenses or a desire to reduce your overall debt-to-asset ratio, you should know that a loan modification will likely affect a lender’s willingness to extend credit or provide financing in the short term.
That is why you need the advice of a loan modification lawyer before you make a serious refinancing decision. In general, two events during a loan refinancing transaction can negatively affect your credit score:
Defaulting on loans — According to bankrate.com, your payment history accounts for about 35 percent of your credit score. Therefore, the most serious mistake you can make is to miss payments on your credit obligations and allow your loans to go into default. If your bank is unwilling to refinance unless you are in default, you should consult with an attorney before you begin to miss payments. Each missed payment negatively impacts your credit score.
Refinancing your loan — According to MyFICO.com, each credit inquiry, change to your loan balance or change to your financing agreement can negatively affect your credit score. In addition, if your loan is classified as a new loan, your credit score could be adversely affected by the new loan obligation. You can limit these negative effects by limiting the number of banks and refinancing agencies authorized to make such inquiries into your credit score and by talking to a lawyer before making any loan commitments.
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