Does a Late Mortgage Payment Harm the Chance to Refinance?

Stay current on your mortgage payments if you want to qualify for a refinance.

Stay current on your mortgage payments if you want to qualify for a refinance.

By refinancing your mortgage loan to one with lower interest rates, you can shave hundreds of dollars off your monthly loan payments depending upon the size of your mortgage and the interest-rate drop you manage to score. But be careful to stay current on your mortgage-loan payments before you apply for your refinance: A late mortgage payment could lower your chances of qualifying for a refinance.

Good Credit

A refinance only makes sense when you can lower your interest rate enough to significantly lower your monthly mortgage payment. For instance, if you have a 30-year fixed-rate mortgage loan of $200,000 with an interest rate of 7 percent, your monthly mortgage payment will be about $1,330. If you lower that interest rate to 4 percent, your monthly mortgage payment will come out to about $954. That's a monthly savings of about $376. It's important to generate such savings, because a refinance isn't free; it can cost from 3 percent to 6 percent of your outstanding loan balance, on average. To nab such a significant interest-rate drop, though, you'll need good credit.

Credit Score

Lenders today generally reserve their lowest interest rates for borrowers with credit scores of 740 or higher on the popular FICO credit-scoring scale. Such a score tells lenders that borrowers have a history of paying their bills on time and managing their debts maturely. Lenders consider such borrowers to be at a far lower risk of defaulting on their monthly mortgage payments.

Late Payments

One of the ways to increase your odds of landing a high credit score is to pay all your bills on time, including your mortgage payment. Late payments can quickly lower your three-digit score. The myFICO.com Web site says that your payment history accounts for 35 percent of your FICO credit score, the highest percentage of any factor.

If You're Rejected

If you're rejected for a refinance partly because of a late mortgage payment, don't get discouraged. You can improve your credit score over time by paying your bills on time and paying down your credit-card debt. You can then try to refinance at a later date, once your credit score has improved to the point where you can qualify for a lower interest rate.

About the Author

I'm a veteran freelance writer with more than 15 years experience writing for newspapers, consumer magazines and trade publications. My stories have appeared in the Chicago Tribune, Washington Post, Christian Science Monitor, BusinessWeek Online, Business 2.0 Magazine and many other publications. I am also the managing editor of a real estate magazine based in Chicago and the writer of www.propertycrossroads.com, a blog devoted to residential real estate. This year, my first comic-book series, GEARZ, was published by Blue Water Publishing. The company will be publishing three other of my comic-book mini-series in 2008 and 2009.

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