If you’ve been keeping an eye on falling mortgage refinance rates, you might be considering what impact refinancing can have on your wallet and credit. Typically, refinancing your mortgage does affect your credit score, at least temporarily. Here’s how.
How refinancing a mortgage affects your credit
Even though there are many long-term benefits of refinancing your mortgage, there are a few ways the refinancing process 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, president and chief relationship officer of the nonprofit Credit.org. “How strong that impact is will vary a lot depending on many factors.”
The ways a mortgage refinance can impact your credit score include:
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 just one year and remain visible on your credit report for two.
“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.”
New loan vs. old loan
The length of your credit history accounts for 15 percent of your FICO score and includes how long your mortgage has been open. When you refinance your mortgage, you’re closing the existing mortgage in exchange for a new one, “so you effectively shorten the age of your average credit account,” Opperman says.
Juggling multiple new loans
Applying for several different types of loans 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.
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 payments, which usually affect your credit score. Regular communication with your lender can help you stay on top of when your payments are due.
Too much debt
If you’re considering doing a cash-out refinance, in which you’ll replace your old mortgage with a new larger one, 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, Battany notes.
What if I refinance more than once?
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 this time around.
What you can do to cushion the impact on your score
Although the impact of a mortgage refinance on your credit score is usually temporary, there are ways you can help soften the blow.
“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.
- Do a “soft” inquiry – Check your credit score yourself at AnnualCreditReport.com well in advance of refinancing, Opperman recommends, rather than having a lender run a hard inquiry. “Once you know your score, you can work to improve it,” Opperman says.
- Get an initial quote from lenders – Ask lenders to give you a preliminary quote based on your credit score without actually pulling your credit. “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 says.
- 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, or 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.
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.
1. Carefully consider “no-cost” or “zero-cost” refinance offers
A no-closing-cost refinance can be helpful if you don’t have the cash to pay for closing costs upfront, but it’s usually in exchange for a higher interest rate or for the costs to be financed with the new loan. Both could mean you end up paying more in the long run.
2. Request a range of rates
When you ask a lender for a quote, Battany recommends also asking the lender to quote a rate that’s slightly higher than the one they come back with, and one that’s slightly lower.
“There are times when a slightly higher rate can be much better in fees and price, or you can get a better rate with only a slight increase in fees,” Battany says.
3. Explore government loan refis
Even if your credit is already in rough shape, options like FHA loans and VA loans can make it possible for you to still take advantage of low refinance rates.
4. Use APR to compare offers
The annual percentage rate (APR) on a refinance offer reflects the true cost of the loan and can provide a more accurate basis for comparing offers.
“Mortgage APR includes interest rate, points and fees charged by the lender, so comparing APRs truly lets you find the best-value mortgage offer for you,” Opperman says.
5. Consider your reasons for refinancing
Ask yourself what your goals are for refinancing your mortgage.
“Really sit down and think about why you want to refinance your mortgage and what you hope to accomplish,” Opperman says. “If you’re just looking to lower your interest rate, you’re probably making the right move, as long as the new loan isn’t too expensive upfront.”
Under the right circumstances, the long-term gains of refinancing would outweigh any short-term blemishes to your credit.