Refinancing your mortgage is a great option if interest rates have dropped since you first obtained your loan, if you want to change your loan terms or if you’re looking to convert your adjustable-rate mortgage into a fixed-rate one.
However, applying for a refinance can still count as a new loan in the eyes of your credit report companies. After all, when you refinance, you’re essentially paying off your old home loan with a new one.
In short, yes, refinancing your mortgage can affect your credit score, but how and what can you do to protect your finances as much as possible? Learn more below.
Refinancing your mortgage involves taking out a new loan to pay off your old debt. Since your credit history is taken into consideration when determining your credit score, closing an old account and opening a new one could negatively affect it. “New” debt could be considered riskier for lenders since you haven’t proven that you can pay it back consistently. However, making timely payments on this new account can help increase your credit score over time.
In addition, lenders would review your credit when you apply for a refinance, and it would count as a hard inquiry on your credit report which has an impact on your scores. Depending on the FICO® model your lender is using, you could have as little as 14 days or as many as 45 days to shop for an interest rate for it to count as only one hard inquiry. Transunion® advises keeping your shopping to a shorter window.
Otherwise, every loan application could result in a hard inquiry on your credit report. These inquiries typically stay on your credit report for 2 years, however only inquiries that have been made in the last year affect your credit score.
If your credit score does decrease after applying for a refinance, keep in mind that it’s not irreversible. Preparing yourself for the impact and maintaining good financial habits are keys to your success.
While it’s possible that your credit score will be affected during a mortgage refinance, there are ways you can still protect it as you’re going through the process.
Before you even start shopping around for a lender or rate, it’s important to know your credit score and credit history. Check it for free at AnnualCreditReport.com well before you start the refinancing process to look for any signs of fraudulence or to give you enough time to improve your score in order to get a more favorable interest rate.
If you’re going to shop around, you may want to ask for initial quotes before you actually apply. Getting a preliminary quote would require the lender to make a “soft pull” on your credit which would allow them to get your credit score without having to pull your full credit history and/or report. Once you’ve narrowed down your options, you can then officially apply for a refinance with a lender or lenders. This would help minimize the required hard inquiries on your credit.
Multiple lenders can run your credit report within a certain period of time for it to count as a single hard inquiry. Make sure you stay within this time frame to help ensure it doesn’t negatively impact your credit score.
As you’re going through the refinance process, it’s important to continue making payments on your other debt on time. This includes your current mortgage, car loans, student debt, credit card bills and more. Staying on top of your other debt payments will prevent any missed or delinquent notices appearing on your credit report as you’re in the middle of refinancing.
Besides making payments on your other debts, it’s wise not to make any other changes to it. This can include making big purchases, like a car, applying for new credit cards, closing accounts or anything else that could affect your credit score. Making any changes to your debts or accounts could negatively affect your credit and impact the interest rate you can secure or even the refinance process as a whole.
While refinancing your mortgage does ultimately impact your credit score, the benefits from a refinance could be worth it for you. Acquiring a lower interest rate or changing the terms of your mortgage could help you save some money through the life of your loan. Additionally, as long as you’re mindful of the other aspects that make up your credit score, your score could eventually increase again to where you were before your refinance.
As always, it doesn’t hurt to speak with a lender or financial advisor before you decide to apply for a refinance to ensure this option is right for you.
Additional Disclaimer:
This article is intended for general informational and education purposes only and should not be construed as financial or tax advice. For more information on financial planning or investment advice, consult a registered investment advisor or financial planner.
This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.