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Adding anything new to your credit profile can alter your score a bit, though many of these changes are temporary in nature. Refinancing your mortgage can temporarily lower your score, but how much and for how long depends on a variety of factors. Find out more below about whether refinancing your mortgage will hurt your credit and what you can do to protect your score.
What Is Refinancing?
Refinancing means taking out a new loan to pay off your old one. For example, if you owe $200,000 on a $300,000 home and your credit is good enough, you can get a different mortgage to pay off that $200,000. You then start paying the new mortgage.
Why would someone refinance a mortgage? Reasons can include:
- To get a better interest rate if their credit or the market is more favorable
- To get different loan terms that better match their financial goals—for example, they might refinance a 15-year mortgage to a 30-year mortgage to reduce the amount they owe each month
- To benefit from cash-out equity—if you owe $200,000 on a home valued at $300,000, you could get a loan for more than the $200,000 you owe and get the difference back in cash to help cover a large expense
While refinancing can be beneficial, it’s not something to do lightly. It comes with expenses, such as closing costs, and does have an impact on your credit. Avoid being a serial refinancer, which is someone who is constantly turning over their mortgage into a new one.
How a Mortgage Refinance Can Damage Your Credit
The impact of a mortgage refinance (“refi”) on your credit depends on your situation and where you stand financially. Here are two specific ways refinancing your mortgage can hurt your credit.
Credit Checks
Hard inquiries can occur when someone pulls your credit report for the purpose of evaluating you for a loan. These can drop your score by a bit. The more hard inquiries on your credit report, the more your score drops, especially if the inquiries are spaced out over the course of many weeks.
Plus, a lot of inquiries on your report can make you look like a desperate borrower, which doesn’t endear you to future potential lenders.
Hard inquiries usually stay on your credit report for two years. However, they only impact your credit score for the first 12 months.
Closing a Loan Account
When you pay off your existing mortgage with a refinance, that account is closed. Eventually, it will age off of your credit report.
One of the factors that’s used to determine your credit score is the overall age of your credit. That means the total amount of time you’ve personally had any credit history, as well as the average age of your open accounts. If you refinance a mortgage, you could be losing an account with a good amount of age on it, and that can temporarily drop your score a bit.
Handle Your Refinance Like a Pro
If refinancing is the right choice for you financially, you can’t avoid the impact of closing an account and opening a new one. But there are some things you can do to help reduce the impact on your credit score.
Be Smart About the Timing
Limit how many hard inquiries are reported by timing your mortgage applications appropriately. The credit scoring models understand that consumers need to shop around for rates and terms, so they group certain types of inquiries as one event as long as they take place within a certain amount of time.
For example, mortgage applications within the same two-week time frame typically count as one inquiry for any scoring model.
You might also want to try a refinance when you haven’t recently applied for other types of credit, such as a personal loan or credit card. Disparate types of applications are listed as different hard inquiries even if you apply for them all around the same time.
Weigh the Pros and Cons
In many cases, a refinance is a negligible and temporary hit to your credit score, so if you’re going to get a good benefit from the action, you might choose to go forward. Just do your research. Use a mortgage calculator to ensure you’ll save money with a refinance before you commit to a new loan.
Don’t Forget About Refinancing Fees
You may need to pay closing costs or other fees when you refinance, so don’t forget to account for those when you’re weighing the benefits. If a refinance saves you $5,000 over the course of the loan and you’re paying $7,000 in closing costs, it’s likely not a good move.
Continue to Make Payments
Remember that your intent to refinance or even an application for a new mortgage doesn’t mean you’re off the hook for payments on your old mortgage. Don’t stop making timely payments until you’re sure the old loan has been paid off and closed.
Sometimes people don’t make a payment they owe this month because a refi is pending on the current total amount owned. But if you pay late, that can mean your payment is reported late to the credit bureaus, which can be a nasty hit to your credit score.
Don’t worry about overpaying and wasting any money on your old mortgage—if there’s a difference between your payments and the refi amount you overpay, the old mortgage company must refund that difference to you.
Once you’re set up with the new mortgage, ensure you make timely payments on that loan. Payment history is the largest factor in your credit score, so paying your bills on time and consistently is the best way to erase any temporary damage a refinance might have done to your credit score.
Check Your Credit Before and After
Being in the know about your credit score is one of the best ways to protect it, regardless of what financial actions you’re taking. Check your score before you refinance a mortgage to ensure everything’s in order and help you understand what types of mortgage might be right for you.
Check it afterward to keep an eye on things as your credit recovers from any temporary blip that might occur. If you find anything on your credit report that’s wrong or you’re surprised by a lower-than-expected credit score, you might need to do some credit repair work.
Find out more about how Lexington Law can help you address inaccurate negative items on your credit report and work toward a generally more positive credit future.
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