Consumers seem to be obsessed with their credit scores and what impact certain actions may have on them. Perhaps the credit bureaus and credit score distributors are to blame, as they are constantly urging us to check our scores for any changes.
Let’s cut to the chase. When it comes to mortgage refinancing, your credit score probably won’t be negatively impacted unless 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 hard credit inquiry as a result. It’ll stay on your credit report for two years, but only affect your scores for the first 12 months.
The credit inquiry alone won’t necessarily lower your credit score, but if you’re constantly refinancing and/or applying for other types of new credit, the inquiries could add up to a point where they’re deemed unhealthy. The credit score scientists found out long ago that individuals who apply for a ton of new credit are often more likely to default on their obligations. But that doesn’t mean you can’t apply for mortgages and other types of credit if and when you feel it’s necessary.
You Could See a Credit Score Ding When Refinancing Your Mortgage
All three of your credit scores may fall temporarily, as a result of a mortgage refinance application but the impact is usually quite minimal, say only 5-10 points and fleeting, with score reversals happening in a month or so.
Because a mortgage refinance is a new credit application, your credit score(s) 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.
You Get a Special Shopping Period for Mortgages
First off, 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 multiple ones take place 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 from different lenders. But they will only count as one credit hit because the credit bureaus know the routine when it comes to shopping for a mortgage. And they actually want to promote shopping around, as opposed to scaring borrowers out of it.
You Lose the Credit History Once the Account is Closed
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.
Cash Out Refinance Means More Debt, Possibly a 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 not got $400,000 in outstanding debt. The larger loan balance will increase your credit utilization, and it could result in a higher monthly payment, both of which could push your credit score lower.
In short, the more credit you’ve got outstanding, the greater risk you present to creditors, even if you never actually miss a monthly payment.