If you decide to refinance your mortgage, it can have a small influence on your credit score. However, if you refinance on a regular basis, it can have a more substantial effect.
When you refinance your mortgage, the mortgage lender will pull your current credit report. This will put a hard credit inquiry on your report which will lower your score. This will stay on your credit report for two years, but it only affects your score for a year. (thetruthaboutmortgages.com)
The hard credit inquiry does not necessarily lower your score. But if you are regularly refinancing and applying for new credit cards, the inquiries can reach a point where they can lower your score quite a bit. Credit score experts figured out ages ago that people who apply for a lot of new credit are more likely to default. But this does not mean you should not apply for a mortgage or other credit if you think it is necessary.
For homeowners, refinancing offers the opportunity to save money through a reduced interest rate, tap into home equity, or modify loan terms. However, the potential drawback is that the refinancing process may lead to a temporary drop in your credit score. The positive aspect is that your credit has the potential to recover over time.
What You Can See In Your Credit Score When You Apply for a Refinance
- All three credit scores could drop a bit temporarily
- The impact may be only five or 10 points
- Score reversals can happen in a month or so, unless you continue to apply for new credit
Upon applying for home refinancing, lenders will assess both your credit score and credit history. This evaluation, referred to as a hard inquiry, may lead to a temporary, slight decline in your credit score. However, the potential savings achieved through refinancing, particularly in the case of a mortgage, typically outweigh the minor negative impact on your credit score. Over time, as you consistently make payments on your new loan, your credit scores are likely to improve due to the establishment of a positive payment history.
The mortgage being refinanced will undergo closure, a process that may contribute to a reduction in your credit score as it involves closing a longstanding credit account. Nevertheless, certain credit scoring models consider the payment history associated with the closed loan. If the closed account was concluded in good standing, this mitigates the impact on your credit score. Moreover, as you make payments on the refinance mortgages and reduce its balance, your credit score is expected to experience improvement once again.
While it is impossible to say with certainty how much your score will drop with a refinance inquiry, it should not be that bad unless you have a lot of recent inquiries. People with a longer credit history will have less of an effect on their credit score if they have a mortgage refinance inquiry. Those with a limited history could see a bigger effect.
Find out what credit scores you need to refinance a mortgage today.
Special Shopping Period for Mortgages
When you are shopping for a new mortgage, FICO will ignore any mortgage-related inquiries that are less than 30 days old. They will not count against you. For mortgage inquiries that are more than 30 days old, they can be treated like a single inquiry if several take place within a few weeks.
For instance, if you are shopping for a refinance in a 30 day period, you could have several credit pulls from several lenders. But they only count as a single credit hit because the bureaus know that people often need to check with several lenders when refinancing. And, credit bureaus actually want to encourage you to shop for a mortgage, so they treat this situation as just one hard credit inquiry.
This of course differs from shopping for several credit cards in a short time. This can hurt your score because you are applying for different loan products with different credit card issuers.
Even if you are shopping for a refinance with several lenders, if it is for the same reason, you should not have your credit hit more than a single time.
But note this shopping period can be only 14 days for older FICO versions compared to 45 days for newer versions. And keep in mind if you space out refinance apps too much, you may have more than one hard inquiry on your credit report. It should not be too damaging though, and should not keep you from looking at different lenders.
The possible savings you can enjoy from a lower rate should definitely be more important than a small hit to your credit, which is usually short lived anyway. Meanwhile, you can enjoy a lower interest rate on your mortgage for 30 years!
Lose Credit History Once Old Mortgage Is Closed
One possible negative to refinancing is you will lose your old credit history benefit on the old mortgage. It is being paid off by a new account. So, if you had been paying the mortgage for 10 years, that account becomes inactive when you refinance, so this can cost you in your credit score.
Keep in mind that older, more established credit lines are the best asset on your credit score, so replacing them with new lines of credit could harm your score at least in the short term. Also, it can affect the average age of your credit accounts, which is also a negative.
Cash Out Refinances Can Hurt Your Score
Pulling cash out of your home with a refinance results in a larger loan balance, which means you have more debt on your credit report. This will mean a higher level of credit utilization and a higher monthly payment, so your credit score could be pushed lower. Generally, the more credit being used, the higher risk to creditors, even if you never miss a payment. Learn more about cash-out refinance rules for 2023. It always makes sense to weigh the benefits and risks with a home equity loan and refinance for cash out.
Overall, a refinance of your mortgage should have a good enough reason behind it to outweigh any negative credit score problems. See also low credit score mortgage options. So think about why you are refinancing your loan first before any worry about your credit score.
References
- Does Refinancing Hurt Your Credit Score? (n.d.). Retrieved from https://www.thetruthaboutmortgage.com/does-refinancing-hurt-your-credit-score/
About Tom
Tom Murphy grew up in La Jolla, California surfing and carving his niche in the local real estate market. Mr Murphy has a stellar record as a loan officer with over a decade of experience helping people secure the right home loan. He now works at Movement Mortgage in Carlsbad CA. NMLS # 662141
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