How Can I Repair My Credit to Refinance My Mortgage?

Trisha Miller  | 

When you initially signed for your mortgage, you agreed to a certain percentage of interest and an initial term — usually 15 to 30 years. That amount of time can give interest rates a lot of opportunity to change. If you’re planning on staying in your current home for a while, you can potentially lower your monthly payment, adjust your mortgage term, and take advantage of lower interest rates by refinancing.

Although a lower interest rate is tempting, in order to get the the best rate in a refinancing, many Americans need to start working on improving their credit. If you’ve owned a home for several years and it feels like your payment is just more than you can comfortably afford, or you just want to take advantage of historically low rates, it’s time to start thinking about refinancing. The only way to do that is with a good credit score. If you feel that yours is lacking, solidifying good credit habits now can help you save hundreds each month on your mortgage.

How Can Mortgage Refinancing Help Me?

Refinancing is a way to help make your mortgage more manageable. It involves a credit check in order to negotiate the current terms of your mortgage and/or qualify for an entirely new loan that will take over your old one. Essentially, the goal is to do whatever is necessary in order to lower your monthly payments. This might mean discussing the interest rate associated with your loan or the term of your loan (usually twenty to thirty years on a mortgage).

For example, you might have purchased a home ten years ago with a variable interest rate, and now you feel that your interest rates have skyrocketed and your monthly payment is out of control. You can now open up a new loan, that pays for the remaining balance on your old one, and select a fixed rate of interest that is lower than what you currently pay. Fixed rates of interest are particularly great because you will never be surprised again with a fluctuating rate of interest.

You may be able to refinance your mortgage with your bank or lender without opening up a new line of credit, but oftentimes it is required. If you do choose to open up a new line of credit, you have the added advantage of choosing your loan term. This means, if you were creeping up on the date your loan was initially supposed to close, but your monthly payments are unbearable, you can stretch out those payments for a longer period of time, effectively lowering your monthly obligation by spreading it out further. If you had ten years left on your loan, you may be able to open up a new line of credit with a term of 15 years instead. This will manage your debts in a much more budget conscious fashion.

Why Do I Need Good Credit to Refinance?

In order to be approved for a possible refinance, you have to show that you still have good habits financially. Banks and lenders will check your credit to see if your spending behaviors have improved, stayed the same, or have gotten worse. If you’ve made some credit mistakes since you first purchased your home, you might find it difficult to be approved for a new loan with a lower interest rate.

Even though you’ve been approved in the past, that information was based on your credit score that you had at the time of closing on your home loan. Especially after several years, anyone’s credit score and spending habits can change the same way interest rates can change with the economy. The bank needs to ensure that you’ll be able to comfortably handle the cost of the new loan in addition to whatever other financial obligations you currently have on your plate. New loans always mean new risks for lenders, and your credit score is the best tool you have to show you are a low risk, and therefore deserve the best interest rate.

How Can I Improve My Credit Score?

Paying off Debt:

First, work on paying off any other lines of credit. Making payments on time and lowering the total amount of debt you have is the best way to turn your credit score around. This may include debt consolidation. If you’re feeling overwhelmed with debt, including your mortgage, you may want to consolidate your debt into one manageable monthly payment. This works especially well if you’ve got too many lines of credit to keep track of. Many Americans have car loans, credit cards, personal loans, mortgages, and more to think about.

In addition, debt consolidation can help if you feel that you run a risk of default on any loans or if you already have some loans that have been sent to collections. Remembering which payments are due when and in what amount can be extremely overwhelming. Debt consolidators will not get rid of any of your debt, they’ll simply wrap up all of your debt into one easy monthly payment. Do some research on companies that provide debt consolidation loans and reach out to your banks and lenders as well to see what options they might have for you. The goal here is to get your payments low enough that you feel you can comfortably pay them all on time.

Use a Secured Credit Card:

The next thing on your list could be to open a secured credit card. I wouldn’t suggest this to anyone who is already feeling overwhelmed by debt, but if you’re suffering from bad credit due to some hefty mistakes and you want to counteract them with good habits, this is a simple way to start building a more positive, consistent credit history. Secured credit cards require a deposit, so they’re very low risk to lenders. The credit amount is usually modest, so you won’t have to worry about thousands of dollars of debt in opening this new card account. As part of the application, your credit will be checked in order for your spending habits to be reported on your credit history. Simply use it when you want to, and then pay it off. Every time that you make an on-time payment, you’ll get a piece of positive information added to your credit history, which will influence your credit score (not tremendously, but it will). Over time your credit score will rise according to the amount of positive entries on your credit history.

Work With a Credit Repair Agency:

Lastly, if you have more credit mistakes than you can manage, it might be time to work with a credit repair agency. Credit repair agencies can help you to clear up some things on your credit history. They can’t erase entries that are correct, but they can point you in the right direction as far as, which issues are weighing down your credit score the most and where to start in order to get it sorted out.

When you have an extensive credit history, there’s an increased risk of mistakes on your credit report. Part of credit repair includes a credit repair company looking over your report for inaccuracies or duplicate entries. A credit repair agency can help tidy up items that are unnecessarily weighing down on your report. Often times when loans have been issued through one lender and then are sent to collections, you can see multiple issues for the same loan, which are bringing you overall score down.

What’s more, you may have other individual’s mistakes that are taking a toll on your credit score. Credit repair also entails checking loans to make sure they are actually your own. There may be accounts that are a family member’s or friend’s that have been opened in your name. If these accounts aren’t kept up with, they will bring down your credit score. You could also be an unknowing victim of credit fraud. If you personal information has been compromised, scammers may have opened up new lines of credit in your name. If you’re working with a credit repair agency, they’ll also be looking for accounts that appear to be fraudulent and that aren’t familiar to you.

Refinancing your home is a smart thing to do for those of us who plan on living in their home for years to come. It can take a large financial burden off of you in general or if you have other loans to worry about as well. Repairing your credit, if you’re suffering from bad credit, is the only way to get approved for refinancing. There’s no bad time to start working on healthy financial habits. Once you’re able to get your credit into a credible range, refinancing will truly relieve you from some of the financial burden of homeownership, opening your wallet up to many other exciting possibilities.


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Trisha is a writer and blogger from Boise, ID. She is a dedicated vegan, an avid gamer, cat lover, and amateur SFX artist.

This post was updated August 22, 2017. It was originally published August 26, 2017.