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
- Credit scores may decline
- As a result of a refinance application
- But the hit is usually minimal
- Say only 5-10 points
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.