Rate shopping won't hurt credit score Ask Dr. Don by Don Taylor, Ph.D., CFA, CFP • Bankrate.com

Dear Dr. Don,
I am looking to refinance my home for the third time. We have an 80/20 fixed-rate mortgage combined with an adjustable-rate loan. It was good for the first year but way too risky. I want to go back to a 30-year fixed-rate mortgage.

My question is, "Would it hurt my credit score to shop around for different loan rates?" I've heard that it will. I don't want to give information to one company and then look at another only to find out my interest rate is higher due to the multiple credit applications.
Thank you,
-- Mark Manage

Dear Mark,
With an 80/20 loan, at least at closing, the homeowner doesn't have any equity in the property. That generally means that the second mortgage is at a higher interest rate, based on the risk the lender faces in making that loan. The second mortgage can be either a line of credit, which is an adjustable-rate loan, or a fixed-rate loan.

In your case you have an adjustable-rate mortgage so your interest rate will change with changes in the underlying rate, normally the prime rate. Since the prime rate moves in lockstep with changes in the targeted federal funds rate, the prime rate has increased by a quarter percent 17 times since June of 2004 to its current level of 8.25 percent. You track the prime rate on Bankrate's Rate Watch page. 

Every time you refinance you pay for the privilege. Closing costs on a new first mortgage will run in the thousands of dollars and refinancing a home equity line can cost hundreds of dollars. The Bankrate feature, "Closing cost comparison: N.Y. most expensive again," helps you to estimate your closing costs. 

You trade off paying those costs against the savings associated with lower interest expenses. In general, the less time you plan on staying in the house, the harder it is to justify a refinancing. Combine that with the expectation that the prime rate is at or near its peak level for the cycle of rising interest rates and it can be in your best interest to stay in the current loans.  

The Mortgage Professor's Web site has a refinancing calculator that will help you decide whether combining your two mortgages into one fixed-rate mortgage can make sense.   

Shopping lenders for a mortgage doesn't hurt your credit score if you do it in a short time period. 

The myFICO.com Web site explains it this way:

Looking for a mortgage or an auto loan may cause multiple lenders to request your credit report, even though you're only looking for one loan. To compensate for this, the score ignores all mortgage and auto inquiries made in the 30 days prior to scoring. So, if you find a loan within 30 days, the inquiries won't affect your score while you're rate shopping. In addition, the score looks at your credit report for auto or mortgage inquiries older than 30 days. If it finds some, it counts all those inquiries that fall in a typical shopping period as just one inquiry when determining your score. For FICO scores calculated from older versions of the scoring formula, this shopping period is any 14 day span. For FICO scores calculated from the newest versions of the scoring formula, this shopping period is any 45 day span. Each lender chooses which version of the FICO scoring formula it wants the credit reporting agency to use to calculate your FICO score.

Doing a little rate shopping on Bankrate to get a sense of where mortgage rates are in your market before taking out any loan applications with individual lenders can help you narrow the field of potential lenders.

To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "financing a home," "saving & investing" or "money."