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If you’re considering a refinance, you might be thinking about what impact the change in your mortgage can have on your wallet and financial profile. To put it bluntly: Does refinancing your home loan hurt your credit score?
Typically yes, but only temporarily. Here’s how — and when you can expect those effects to wear off.
How refinancing a mortgage impacts your credit score
Even though there are many long-term benefits of refinancing your mortgage there are a few ways refinancing can make a shorter-term dent in your credit score.
“Any application for a loan or credit will have an impact on your credit,” explains Melinda Opperman, chief external affairs officer of the nonprofit Credit.org. “How strong that impact is will vary a lot depending on many factors.”
To help you get a feel for the impact, it can be helpful to know how much the FICO score — the mostly commonly used credit score — weighs various considerations. Here’s a look at the data groups that get evaluated and how much they matter:
- Payment history: 35%
- Amounts owed (i.e., total debt): 30%
- Credit history length: 15%
- Credit mix: 10%
- New credit: 10%
So, does refinancing hurt your credit? Short answer: yes. But actually, there are several ways in which a mortgage refinance can impact your credit score.
Whenever a mortgage lender conducts a hard credit check to see if you qualify for a refinance, that inquiry is recorded on your credit report.
Credit inquiries affect your FICO credit score for one year or less (potentially even only a few months) and remain visible on your credit report for 24 months. If you already have a few of these “hard pulls” on your report, any new ones will keep your score down until two years have passed.
“For most people, one additional inquiry will take less than five points off their FICO scores,” Opperman says. “However, as you get multiple inquiries, it starts to add up, as inquiries account for 10 percent of your total FICO score.”
Length of credit history
As we mentioned above, the length of your credit history — that is, how long you’ve had all your various loans and accounts — for 15 percent of your FICO score. That includes your mortgage. When you refinance, you’re basically replacing the old, existing mortgage with a new, younger one. “So, you effectively shorten the age of your average credit account,” Opperman says.
If your current mortgage was one of the first debts you incurred, refinancing to a new one can have a significantly negative effect on the your score. Check the age of your lines of credit and credit accounts. If your current home loan is your oldest by far, you should be prepared for a fairly big dip after your refi.
Juggling multiple new loans
Applying for several different types of loans all at the same time can drive down your credit score faster than if you were focusing solely on doing a mortgage refinance, notes David Battany, executive vice president of Capital Markets for Guild Mortgage.
“If the borrower is shopping for all sorts of debt — mortgage, car loan, credit card — then that pull would become a negative on their FICO score,” Battany says.
Now, that’s not the case if all your applications are home loan-related. Since shopping around is so important for a mortgage, credit bureaus cut you some slack if all the inquiries are coming from mortgage lenders (see “How to protect your credit” below). They figure you’re comparing offers: being a savvy consumer, not just a spendthrift on a spree. So your credit score won’t get dinged as much.
Late or missed payments
When you’re in the process of refinancing and replacing one mortgage with another, it can be hard to keep track of how much longer you need to keep making payments on your old mortgage and when to start making payments on the new one. That confusion can result in delinquent or missed payments, which affect your credit score in a big way — payment history counts for 35 percent of your FICO. Regular communication with your lender can help you stay on top of when your payments are due and help you avoid a bigger credit score drop after refinance.
Amount of debt owed
If you’re considering doing a cash-out refinance, in which you’ll replace your old mortgage with a larger one (and taking out the difference in cash), you could be adding to your debt load, Battany cautions.
“In that scenario, you have a greater possibility that it can hurt your FICO score,” Battany says. However, if you’re doing a cash-out refi in order to pay down revolving, unsecured debt, like a credit card balance, that’d ultimately have a positive effect on your score, he notes.
How to protect your credit when refinancing your home
Does refinancing affect your credit? By now you should have a clear answer: yes, and not in a positive way. Although the impact of a mortgage refinance on your credit score is usually temporary, you probably want to take steps to avoid the drop as much as possible. Fortunately, there are ways you can help soften the blow post-refinance.
“There are scenarios where any negative impact can be quickly overcome, which can make refinancing a mortgage a good idea from a credit standpoint,” Opperman says.
- Give yourself 45 days – Under the new FICO credit model, any hard credit inquiries made within 45 days are bundled and treated as one inquiry for scoring purposes. So even if you’re getting quotes from multiple lenders, your credit will only take one hit as long as you limit your comparison-shopping to a 45-day window.
- Look for yourself – Check your credit score yourself at AnnualCreditReport.com well in advance of refinancing, Opperman recommends — rather than discover the number after a lender runs a hard inquiry. “Once you know your score, you can work to improve it,” Opperman says.
- Get an initial quote from lenders – Only hard credit inquiries affect your score — “soft pulls,” which go into less background, don’t. So you can ask refinance lenders to give you a preliminary quote based on one of these soft pulls, which tells them your credit score without actually pulling your full credit history. “Once you’ve narrowed the field down a bit, you can let the last few lenders do a full credit check and formally offer you a new loan,” Opperman recommends.
- Leave your credit alone – Aside from paying off outstanding balances, avoid making any big changes where your credit is concerned during the refinancing process. “Don’t buy a new car, get a new credit card, or do anything that could impact your credit score while working toward your new mortgage,” Opperman says. If you do pay off a card, hold off on closing the account, as that could shorten the length of your credit history and hurt your score.
- Make timely payments on other debt – This is a time to be extra diligent about managing your other debt, from car loans to credit cards to your existing mortgage. Make sure no payments get lost in the shuffle as you apply for your refinance. You don’t want any sort of missed or delinquent notices showing up on your record at this point.
Next steps to refinance your mortgage
Once you’ve made a plan for how to protect your credit during the refinancing process, there are a few steps you can take to help land the best refinance rate and terms:
- Carefully consider “no-cost” or “zero-cost” refinance offers: A no-closing-cost refinance spares you a lot of immediate expenses for various fees. But it can mean paying more in the long run, since the lack of these upfront costs is usually in exchange for a higher interest rate.
- Request a range of rates: When gathering initial quotes, you should consider asking the lenders for a range and/or for different scenarios: if you were to pay discount points, get a smaller loan, etc. That can help you in shopping around and give you a sense of different options and the lender’s flexibility.
- Explore government loan refis: If your credit is in rough shape, government-backed options like FHA loans and VA loans may still make it possible for you to refinance, as their lending criteria are often more lenient. However, your existing mortgage must be with one of these agencies; they won’t refinance conventional loans.
- Use APR to compare offers: The annual percentage rate (APR) on a refinance offer reflects the true cost of the loan — including fees — and can provide a more accurate basis for comparing offers.
- Consider your reasons for refinancing: Ask yourself what your goals are for refinancing your mortgage. Ideally, the long-term gains of refinancing would outweigh any short-term blemishes to your credit.
Remember: Soft credit checks don’t affect your credit score and you might be able to explore refi rates with just a soft check. But a hard check — which will happen if you move forward with the formal application process — will result in a credit score drop after refinance.
FAQs about mortgage refinancing and your credit
The number of times you refinance your mortgage shouldn’t do any compounding damage to your credit if you space the refis out. Waiting at least one year before you refinance again will make it so that the new round of credit inquiries won’t accumulate with the first time you refinanced, Opperman says.
Rather than a credit hit, where homeowners typically lose when doing multiple refinances in a short time frame is the money spent on closing costs and other fees.
“Ultimately, the main reason not to refinance too often isn’t your credit score; it’s simply how expensive refinancing is, and how long it takes to recoup the savings you might get on your mortgage payment,” Opperman says.
It’s worth noting that if your credit score was in good shape when you got your mortgage or after your last refinance, and it’s remained that way, you should be able to get a good rate again, Of course, you’ll want to make interest rates have stayed steady or, better yet, gone down in the meantime. If rates are on the rise, it’s usually not the best time for a refinance.
Does refinancing affect your credit forever? Fortunately, no — the impact is only temporary. While evidence of the lender’s credit check stays on your report for two years, you should see its negative effects fall off, and your score rise again, somewhere between a few months to a year.
Usually, lenders will check your credit twice: once when you formally apply for the new mortgage — to determine what APR to give you, based on your borrower profile — and again right before the closing, to make sure nothing has changed in the interim. If you can complete your refi process in 45 days or less, though, those inquiries get bundled together, helping to minimize your credit score drop after the refinance.