Increase Your Credit Score Before Refinancing a Mortgage

People refinance their mortgages for many different reasons. But the end goal is usually the same in all cases -- get a better interest rate!

Improving your credit score is a crucial step in qualifying for a better interest rate. Sure, you can refinance to take advantage of a more favorable market. But when you improve your credit score at the same time, you could get an even lower rate. This, of course, translates to a small mortgage payment each month.

Maintaining a Good Credit Score

When it comes to your credit score, an ounce of prevention is worth a pound of cure. It's a lot easier to maintain good credit than it is to recover from bad credit. So the best strategy is to stay out of that "neighborhood" to begin with. That way, when the time comes to refinance your mortgage, you'll be more likely to qualify for the best rate.

Five steps to a better credit score:

1. Debt-to-Income Ratio

Try to keep your debt-to-income ratio at 20% or below. Mortgage lenders like it when your overall debt equals no more than 20% of your net monthly income. If you're currently above the desired 20% mark, try to pay down your debt as quickly as possible.

2. Reducing Balances

Keep your credit card balances as low as possible. When these balances get out of control, it increases your overall debt. This leads to an unfavorable debt-to-income ratio (previous item).

3. Paying Bills

Pay all your bills on time. You've probably heard this one before, but that's only because it goes hand in hand with a good credit score. On the contrary, a history of late payments will lower your score.

4. Paying Minimums

Pay your minimum balances. Every time you receive a credit card bill, pay at least the minimum amount that's due. If you can pay more than the minimum, that will certainly help. But at the least, pay off those minimums religiously. This will reduce your credit card balance more quickly and help you reach a favorable debt-to-income ratio (as mentioned above).

5. Controlling Credit

Avoid taking on too many loans. If you apply for a line of credit too often, you might send a signal that you cannot manage your finances.

Refinancing your mortgage to take advantage of lower interest rates can be a smart financial move. But when you refinance with good credit, you stand an even better chance of lowering your interest rate. So be proactive in maintaining a good credit score.

by Brandon Cornett