Mortgage Q&A: “Does refinancing hurt your credit score?”
Consumers always seem to be overly concerned about their credit scores and what impact certain actions may have on them; perhaps this is a result of all that clever marketing on behalf of the credit score creators and distributors.
When it comes to mortgage refinancing, your credit score probably won’t be negatively impacted unless perhaps you’re a serial refinancer. Like anything else, moderation is key here.
When you refinance your home loan, the bank or mortgage lender will pull your credit report and you’ll be hit with a credit inquiry as a result.
The credit inquiry alone won’t necessarily lower your credit score, but if you’re constantly refinancing and/or applying for other forms of new credit, the inquiries could add up to a point where they’re deemed unhealthy.
You Could See a Credit Score Ding When Refinancing
As a result, your credit score could see a bit of a ding, though it probably won’t be anything substantial unless you’ve been applying anywhere and everywhere for new credit.
By a “ding,” I mean a drop of 5-10 points or so. Of course, it’s impossible to say how much your credit score will drop, or if it will at all, because each credit profile is unique.
Put simply, those with deeper credit histories will be less affected by any credit harm related to the mortgage refinance inquiry, while those with limited credit history may be see a bigger impact. Think of throwing a rock in an ocean vs. a pond, respectively. The ripples will be a lot bigger in the pond.
Also keep in mind that shopping for a refinance in a short period of time (say a month) may result in a large number of credit pulls, but it will only count as one credit hit because the credit bureaus now know the routine when it comes to shopping for a mortgage. And they want to promote shopping around, not scare borrowers out of it.
This differs from shopping for multiple credit cards in a short period of time, which could hurt your credit score more because you’re applying for different products with different issuers. Even if you shop for a mortgage refinance with different lenders, if it’s for the same single purpose, you shouldn’t be hit more than once.
Another potential negative to refinancing is that you’d lose the credit history benefit of the old mortgage account, as it would be paid off via the new refinance.
So if your prior mortgage had been with you for say 10 years or more, that account would become inactive once you refinanced, which could cost you a few points in the credit department as well.
Remember, older, more established tradelines are your credit score’s best asset, so wiping them all out by replacing them with new lines of credit could do you harm in the short-term.
Cash Out Refinance Means More Debt, Lower Credit Score
Also consider the impact of a refinance that results in a larger loan balance, such as a cash-out refinance.
For example, if your current loan balance is $350,000, and you take out an additional $50,000, you’ve now got $400,000 in debt.
The larger loan balance will increase your credit utilization, meaning you’ll be using more of your total available credit, which could push your credit score lower.
In short, the more credit you’ve got outstanding, the higher a risk you present to creditors, even if you never actually miss a monthly payment.
But all in all, a refinance should have a compelling enough reason behind it to eclipse any credit score concerns, so focus on why you’re refinancing your mortgage first before worrying about your credit score.
Ultimately, I’d put it on the no-worry shelf because chances are the refinance won’t lower your credit score much, if at all. And score drops related to new credit typically revere quickly.
So even if your score fell 20 points, it would probably gain those points back within a few months as long as you made on-time payments.
And most people are only concerned about their credit scores right before applying for a mortgage, so what happens shortly after your home loan funds may not matter much to you.
Read more: When to refinance a home mortgage.