Does Refinancing Hurt Your Credit Score?

September 10, 2009

credit score

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.

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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

refinance credit score

  • Your credit scores may decline temporarily
  • As a result of a refinance application
  • But the impact is usually quite minimal
  • Say only 5-10 points and fleeting

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.

You Get a Special Shopping Period for Mortgages

  • FICO ignores mortgage-related inquiries made 30 days prior to scoring
  • And treats similar inquiries made in a short period (14-45 day windows)
  • As a single hard inquiry
  • To avoid any potential negative impact

First, note that when it comes to FICO scores, mortgage-related inquiries less than 30 days old won’t count against you.

And for mortgage inquiries older than 30 days, they may be treated as a single inquiry if they occur in a small window.

For example, 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.

After all, if you’re only looking to apply for one home loan, it shouldn’t count against you multiple times.

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.

However, this shopping period may be as short as 14 days for older versions of FICO and as long as 45 days for newer versions. So if you space out your refinance applications too much you could get dinged twice.

You Lose the Credit History Once the Account Is Closed

  • When you refinance it results in the closing of the old loan
  • That account will eventually fall off your credit report (in 10 years)
  • And closed accounts are less beneficial than active ones

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.

But savings should outweigh any potential credit score ding, and as long as you practice healthy credit habits, any negative effect should be minimal.

Cash Out Refinance Means More Debt, Lower Credit Score

  • A cash out refi could hurt more
  • Because you’re taking on more debt
  • And greater amounts of outstanding debt
  • Can make you a risky borrower

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 reverse 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.

To ensure you don’t get denied as a result of a credit score drop, it’s helpful to have a buffer, such as an 800 credit score in case your score does drop a bit.

If you’re right on the cusp of a credit scoring threshold and your score dips slightly, you could wind up with a higher interest or at worst be denied a mortgage.

Read more: When to refinance a home mortgage.


7 Comments

  1. Colin Robertson March 20, 2017 at 2:30 pm -

    Lee,

    Hmm, that seems strange…are you sure the mortgage is the issue and not something else on your report? I’m assuming your credit report only shows the current balance and highest balance of the mortgage, payment status, and any delinquencies. If it is in fact reporting the LTV, you may want to inquire with the creditor directly to fix their reporting.

  2. Lee March 20, 2017 at 10:06 am -

    We have home valued at $198,000 paid mortgage for 14 years then 3 years ago refinanced owing $104,000 now owe about $95,000 credit score has been low since and report says my ltv on mortgage is too high, it is calculating from the $104,000 to the $95,000 still owed, not the homes original amount is there any way to correct this? No delinquencies on report, before refi was in high 700s now in mid 600s.

  3. Colin Robertson August 22, 2016 at 7:30 pm -

    Amanda,

    It could be a temporary drop, though if you have no old credit accounts it’s possible that it reduced the average age of your accounts significantly and thus is working against you. But hopefully it’s just a blip and you’ll bounce back soon.

  4. Amanda August 22, 2016 at 3:01 pm -

    Hi,

    I just refinanced my school loans which I had a history for about 6 years. The other company paid off my previous loans but on my credit report dropped 30 points! My report shows that I have an average history of 1 year now instead of 6 and does completely gone South. I have nothing on that student loan that should have affected me negatively. How can I fix this problem and is this something that will stay low for a while now.

    Thanks!

  5. Nancy Pontious April 6, 2015 at 11:13 am -

    I think you are better off receiving calls than putting all of your personal information out there for an identity thief. At least at the lender you will know the source of the theft.

  6. Colin Robertson March 10, 2015 at 7:39 pm -

    Hey Dave,

    I believe Zillow allows you to shop anonymously, but when you get down to the nitty gritty you’re going to need to give out some personal info and probably get on the phone with someone. I guess the best way to reduce the amount of calls is to really decide what you want before you reach out to anyone. Good luck!

  7. Dave Kucifer March 10, 2015 at 4:46 pm -

    I am considering refinancing my current 75,000 mortgage (4.375% apr) in order to get lower rate and include taxes and interest in monthly payments (currently being paid from savings).
    Since I do not plan to be in my home longer than three or four years I am most interested in a no closing cost refinance.
    current credit score is excellent.
    At this point I do not want to be deluged with phone calls from numerous prospective lenders, and prefer all contacts be email. Are there lenders who would be willing to deal through the web?

    Thanks

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