By refinancing your mortgage you can create a great opportunity to save money on your monthly payments by getting a lower interest rate. Since the interest rates have fallen over the years or if you have worked hard to improve your credit score, you could benefit from refinancing.
How Refinancing Affects Your Credit
When you apply for a new loan of really any kind, your lender is going to check your credit score. When they do this it is called a “hard inquiry,” which if done too often can lower your score by a few points. So be careful when you shop around for rates.
FICO treats multiple loans inquires of the same category (auto, mortgage, student, etc.) in a short period of time as a single inquiry. So if you shop around for rates but find the right loan within a specific time period, your score will only be affected once.
Refinancing also results in closing an old loan and opening a new one. This basically means that you will lose your payment history for the previous account in some credit reports. Since payment history makes up to 35% of your FICO score, this could have a negative impact. Other reports and score models will continue to include your payment history for the closed account, which will result in a negligible impact on your credit.
Should You Refinance?
It always pays to consider how the financial decision will affect your credit score. In the case of refinancing the benefits of lower interest rats and lower monthly payments far outweigh the negative effects, the process will have on your credit. The minor impact of hard inquiries on your credit report will ade over time as you build your payment history with your new, refinanced loan, and benefit from the extra money in your pocket.
