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Lenders consider your credit score to be one of the most important factors they use to determine the interest rate you will qualify for, experts say. So while you may see interest rates for refinancing less than 3%, that doesn’t mean you will qualify for those rates. (Some mortgage refi rates hover around 2.5%; see the lowest rates you may be entitled to below, and here).
Simply put, the lower your credit score, the more likely you are to pay interest over the life of your mortgage. Even if you only pay a quarter of a percentage point more than if your credit score was higher, interest can run into the thousands of dollars. If you have a $ 500,000 mortgage at 4.5% and your monthly payment is $ 2,533, refinancing at 4.25% could mean lowering your monthly payment to $ 2,459, which allows you to save $ 324 per month. (Find the best mortgage refinance rates in your area here.)
So what is the credit score you need to get the lowest rates?
“Credit scores of 700 and above are easier to qualify, with the best terms available for those with credit scores of 740 and above. While it is possible to refinance with a credit score between 620 and 680, conditions are not as good, ”said Greg McBride, chief financial analyst at Bankrate. Holden Lewis, Real Estate and Mortgage Expert at NerdWallet, adds Holden Lewis: “Life is easier for refinancers with credit scores of 740 or higher because from a mortgage lender’s perspective, [they’re the] least risky borrowers.
However, as Jacob Channel, Senior Economic Analyst at LendingTree, points out, you don’t always need to have these scores: “For other types of loans, like an FHA loan, a borrower might be approved with one. “
What other factors affect my ability to get refinancing?
Of course, it’s important to understand that getting approved at a good rate for a refi isn’t just about your credit score. Lenders also look at your income and other aspects of your financial profile like your savings, debt, etc. “Lenders are generally unlikely to work with someone who has a credit score below 580, although there may be some exceptions depending on the lender and the person requesting the refinance,” Channel explains. Adding a co-signer to the loan can make someone more attractive, as can saving a lot of money. “Keep in mind that even if the aspects of your overall financial profile outside of your credit score are great, you will still face an uphill battle to gain approval,” Channel explains. (See the best mortgage refi rates you may qualify for here).
How can I increase my credit rating?
If your credit score does not meet the minimum requirements, there are things you can do to get approved for a refinance. “First, you can find a lender who has less stringent credit requirements. Just because one lender hasn’t approved your refinance doesn’t mean all other lenders will, ”Channel says. To boost your credit score, doing things like making monthly payments on time and paying off debt to lower your credit utilization rate are some of the steps Channel advises you take.
If your score is lower than you would like, don’t despair. “If you make all your payments on time and pay off all the revolving debts, time will heal the wounds. If you’re near the threshold, making a large payment on a revolving balance or using something like Experian Boost could get you over the edge pretty quickly, ”says McBride.