Refinancing a mortgage can be incredibly helpful financially, whether for lowering monthly payments, shortening the loan term, or pulling out equity to pay off debt or for other projects. Even as you achieve those fiscal goals, you may wonder what effect refinancing has on your credit. While taking out a new mortgage loan can lower your credit score a little, the benefits typically outweigh the short-term dip. Here’s why refinancing affect your credit and how you can minimize any hits.
- Credit Check
Every time your credit gets pulled by a lender your credit will get dinged a little. These hard inquiries as they are called can cause a temporary score decline of a few points. Continued timely payments and good credit habits will bring your number back up quickly though. The savings from lower interest rates are usually worth the minimal drop. - Multiple Credit Applications
The more hard inquiries you have the more your credit score will fall. During your period of shopping around for the best interest rate or terms, try to keep all these credit checks within a 45-day time frame to have them all count as one inquiry. Stretching multiple loan applications over many months will have a far worse effect on your score. Also, try to avoid applying for any other major purchases (cars, appliances, etc.) during your mortgage application process to avoid additional credit checks. - Closing Older Loans
By refinancing, you are ending an older, existing mortgage. That could potentially lower your credit because it is shortening your credit history, one of the key elements of any score. You are also opening a brand-new, untested loan as well. However, if your previous mortgage was closed in good standing, many credit scoring models will take it into account and lessen the hit to your credit report. And of course, as you continue paying down your new loan on time, your score will improve again. - Cash-Out Refinances
Your credit may see a bigger fall after a cash-out refinance because you are pulling money out of your equity and increasing your credit utilization ratio. By creating more debt for yourself, you have less available credit and your score may decrease. Just remember, that as you continue to make timely payments, your credit will regain its original score after a while. - Missed First Payment
Sometimes there may be confusion about when the first payment of your new mortgage loan is due. Often the first payment is skipped because the old one pays it off. If the old mortgage does not get paid off before the new loan closes, there could be late payment penalties. Just double check with your lender that everything is order and when your first payment is due.
Overall, a mortgage refinance should only have a minimal impact on your credit. Being able to save thousands a year on payments or getting rid of high-interest debt with a cash-out refi can certainly be smart long-term decisions that could end up boosting your score in the end.
Give us a call today and we can answer any questions you might have about refinancing your home.
