Does Refinancing a Mortgage Hurt Your Credit?

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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.

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

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.

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.

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.

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About Bryan Dornan

Bryan Dornan is a Financial Journalist and currently serves as Chief Editor of RefiGuide.org. Bryan has worked in the mortgage industry for over 20 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. He also writes for RealtyTimes, Patch, Medium and other national publications. Find him on Twitter and Muckrack.