This past week I was asked an interesting array of questions from some friends about to refinance their home. Our friends purchased a home about a year ago with a fixed, 30-year loan. The goal they want to achieve is a 15-year loan at a pretty significant rate reduction (approximately 1-1.5%). So the scenarios laid out in front of me were whether to refinance in one or both of their names, and how it would impact their credit.

Lets start with a little bit of background information, as it was told to me. The home is currently mortgaged in both of their names. He has a credit score in the 670+ range; her’s is in the 790+ range. I do not know the specifics of his lower scores.

Our friends have been shopping around the rates, and have determined that one option they have is to qualify for the loan in just her name. So their questions than become, what is the impact to both of their credit by doing so, or should they refinance their home in both of their names, like it currently is?

Their Options (From a Financial Planner)

I certainly am no expert when it comes to credit evaluation. I speak only from having some experience with maintaining great credit reports, and doing a lot of research on the best methods for maintaining excellence and using it to our advantage. So this scenario really made me think about the implications of moving mortgage balances over into one persons name, and how it would impact their reports/scores.

I had my own opinions, but decided to run it by our financial planner for his take on the whole situation, and here is his very excellent thoughts.

1) Should the mortgage be placed into only one persons name of a relationship, one needs to carefully consider the impacts of a divorce in the future with such a decision. No one likes to think about a divorce and they might say it will never happen, which is a great mindset to have, but in today’s world, it is something people should at least be thinking of before making the largest financial decision you will ever make.

That being said, should the home be placed into only one of their names, you need to consider what that means in a divorce situation. In our State, the house is joint property, and would be typically split all things equal. However, with the house in only one of their names, that person is the only one financially responsible for that home. If it was placed into just her name, and they get divorced, and he refuses to make payments to cover the house, and now she can not afford the home, you both lose the home. This could really muddy the waters of a divorce proceeding. Instead if it was in both of their names, there could be interest in both parties of maintaining the home, or least making the payments each month, to not ruin each others credit. In addition, there is then an asset that could be split between the parties.

2) Our financial planner brought up a very good point that he often encounters when being approached by his clients in this same situation. A refinance of your home costs money, typically thousands of dollars. What if the client took the money and directly applied it towards the principal instead? Paying just one extra payment per year can reduce the amount of interest you pay by 6-8 years (depending on your specific calculations). Paying 2 extra payments per year is even more savings. So if a refinance is going to cost say $3,500, that might be 2-3 extra loan payments directly being applied to the principal, getting ones loan down closer to a 15-year mortgage without the cost of a refinance.

The specifics of everyone’s situation is completely different and need to be evaluated as such. One needs to determine what is the payback period in the cost of the refinance versus the interest savings (i.e. over the course of how many payments will they recoup the cost of refinancing). One also needs to realistically think about how long they plan to stay in the home?

I also decided to bounce these scenarios off of my wife, to hear her very valuable opinion of what she thought of the situation should I propose such a plan of action to her.

Their Options (From My Wife’s Perspective)

How long do you plan to be in the home? How secure our your jobs? These are both excellent items to consider before going down the refinance path. Are you planning on staying in the home long enough to realize the savings in interest versus the cost of the refinance? In other words, your refinance could be costing you more money than if you would have just kept the old loan because you moved before recouping the costs.

Also, what is the likelihood of your jobs transferring you in the future? Is there a possibility several years from now your job may say we need you here, and then you are relocating? The time frame can, while possibly unknown, can greatly affect your returns on a refinance.

Their Options (My Opinion)

Again, I am far from any expert when it comes to credit analysis, but can only speak from my own experience, and my opinions are just that.

Here is the thing. If a mortgage is on your credit file, and you continue to pay off the bill each month, it is only going to help your credit by showing a responsible payment history on a different form of credit. So my first opinion would be to keep the mortgage in both of their names not only for the reasons above, but also because it is going to help your credit in the future.

So what will happen to his scores if the mortgage is no longer on the account? I have no idea unfortunately. Plenty of people have good credit without a mortgage on their file. The mortgage on his credit file should show up as paid in full following the refinance, which I would think would help out his scores, and remain on his file as a positive for an extended period of time.

The most important thing at this point is regardless of which decision they decide, they need to make sure they are not late and make all of their scheduled payments.

I am anxious to hear what they decide and how it impacts their credit over the course of the next couple of months. Hopefully I might have something to report back in the near future.