Mortgage search shouldn’t hurt credit

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Dear Dr. Don,
My current mortgage rate is 8.2 percent on a remaining balance of $176,000. I’m 52 and have been employed by the same Fortune 500 company for almost 10 years. I want to refinance to both lower my interest rate and my monthly payment.

What’s the best method? Should I contact my current mortgage holder or contact a different mortgage company? Or, should I do both to be able to get the best rate and closing costs? Will multiple inquiries from numerous lenders adversely affect my credit score?
— Nick Notion

Dear Nick,
When you comparison shop among lenders, it’s treated as one inquiry in calculating your credit score — provided you do the comparisons over a short time span. Here’s how it’s discussed in the myFICO publication, “Understanding Your FICO Score:”

The score allows for “rate shopping.” If you’re looking for a mortgage, student loan or an auto loan, you may want to check with several lenders to find the best rate. This can cause multiple lenders to request your credit report, even though you’re only looking for one loan. To compensate for this, FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur. When you need an auto, student or home loan, you can avoid lowering your FICO score by doing your rate shopping within a short period of time, such as 14 days.

I’d suggest talking to your current lender about refinancing prior to actually applying for a loan with the lender. I also think you should take a look at mortgage rates in your market by using Bankrate’s compare rates feature.

It wouldn’t hurt to know your credit score(s) and review your credit reports to make sure the information in those reports is accurate. The Bankrate feature “Checking and reading your credit report” will help you through that process.

Bankrate’s refinancing calculators will help you compute how much interest you’ll save by refinancing. A key assumption in the refinancing decision is that you plan to be in the home long enough to justify taking on the closing costs associated with a new mortgage.

You’ll also want to carefully consider the term of the new mortgage. If you’re 10 years in on a 30-year fixed-rate mortgage, consider a 20- or 15-year mortgage instead of refinancing with another 30-year fixed-rate mortgage. Extending the term will lower the payment, but it will ramp up the total interest expense on the loan.

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