How Soon Can I Refinance After Paying Off Debt?

Refinancing your house is a bad decision if your credit score has dropped.

Refinancing your house is a bad decision if your credit score has dropped.

Congratulations, you've been able to buckle down and pay off a big chunk of your debt. Now you've improved your credit score. And with a better score, you might be able to refinance your other loans for a lower interest rate. Before you refinance, consider a few factors that can prevent you from making a financial mistake.

Lender Restrictions

Your lender needs to approve the refinancing of your loan. Your loan agreement lists the terms of the loan. One section of your agreement explains any restrictions on loan refinancing. Some companies let you refinance loans right away. Others do not allow refinancing until you've kept your current loan for several years. Because of this, you should consider refinancing restrictions before taking out any new loans. You don't want to get locked into a contract and miss out on a great deal.

Refinancing Fees

The chance to refinance to a lower loan rate sounds great, but make sure the math makes sense. Most loans charge a penalty if you pay them off to early, like when you refinance. You also need to pay fees to apply for refinancing. You could end up paying more in fees than you would save on your loan interest. A loan application officer can help you with this calculation if you are not a numbers person.

Income

While your debt level is important for your loan interest rate, it is just one piece of your financial picture. Lenders also look at your income at the time of your application. If you are making less money than you were when you first applied for your loan, a refinance might not make sense. Your lower debt level is cancelled out by your lower income. In this case, you would not receive a better loan rate and would end up wasting the refinancing fees.

Credit Score

Lenders also look at your credit score during a loan refinance. If your credit score has dropped since your original loan, refinancing could be a mistake. Lenders might deny your application or give you a disappointingly high interest rate. If you stay disciplined, it doesn't take long to repair a credit score. Save the refinancing application fees and use them to prevent taking on more debt. Once your credit is in good shape, your refinance will make much more financial sense.

About the Author

David Rodeck has been writing professionally since 2011. He specializes in insurance, investment management and retirement planning for various websites. He graduated with a Bachelor of Science in economics from McGill University.

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