Credit Repair

What Happens to Your Credit Score When You Refinance a Mortgage?

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Mortgage refinancing allows you to replace your existing mortgage with a new loan. As a savvy consumer, you might worry about what a mortgage refinance will do to your credit.

Since it’s a new loan, the inquiry itself, balance, loan terms and new open date can affect your credit score.

Learn more about mortgage refinancing and the potential impact on your credit so that you can decide if it’s the right choice for you.

What is mortgage refinancing?

If you’re not happy with your current mortgage interest rate — or the terms attached to it — you don’t have to stay locked into the loan until you pay off your home. Instead, consider refinancing your mortgage, which allows you to essentially replace your existing loan with a new one. You’ll pay off the balance of the old mortgage with the new loan, then begin making payments exclusively on the new mortgage.

When shopping around for a refinance, you’ll have two options. You can choose a traditional mortgage refinance or a cash-out refinance. The former simply gives you a new mortgage with a new rate and terms, while the latter means borrowing more than you owe to get the difference in cash. Cash-out refinancing provides you with additional funds, but it will likely increase the size of your monthly payment.

Benefits of refinancing a mortgage

There’s more than one reason to refinance. You may decide to refinance your mortgage to:

  • Lower your monthly payment
  • Secure a more competitive interest rate
  • Convert a variable rate to a fixed rate
  • Modify your loan term
  • Take cash out of your home

Taking equity out of your home can have its own benefits. You might choose a cash-out refinance to:

  • Pay off other debts with higher interest rates, such as credit cards
  • Buy a car or other large purchase
  • Make home improvements or repairs
  • Pay for college
  • Start an emergency fund

How to refinance a mortgage

If you’re planning to refinance your mortgage, shopping around to find the best loan for your unique situation is a must. LendingTree offers a one-stop tool that can recommend multiple mortgage refinance offers. Comparing lenders allows you to make an informed decision so that you can feel confident you’re getting the best possible rate and terms.

Rates aren’t the only factor you need to consider when shopping for a mortgage refinance. Added expenses such as an application fee, loan origination fee, appraisal fee and closing costs can significantly increase the total cost of the loan. Factor all expenses in when calculating the total cost of the loan to help you choose the most competitive offer.

When you’re ready to refinance your mortgage, gather the following documents:

  • Social Security card and photo ID
  • Last three pay stubs and W-2s for the past two years
  • Statements from your retirement accounts and investments
  • Bank statements from the past two months, credit card and loan statements, child support and/or alimony payments, homeowners insurance documents and property tax bills

Do note, the lender will also check your credit report.

When is the best time to refinance a mortgage?

The right time to refinance a mortgage is different for everyone. Generally speaking, it’s best to take this step when rates are low, as you want to secure a more competitive rate than the one you already have.

It’s also wise to wait until you have at least 20% equity in your home, as this will likely grant you access to more refinancing options. If your equity stake is less than 20%, refinancing could be more expensive.

Additionally, it’s best to wait until your credit score is in a healthy state, as this plays a huge role in your refinancing eligibility. You’ll likely receive the most competitive offers with a credit score of 760 to 850.

Will shopping around for a refinance hurt my credit score?

Shopping around for a loan to refinance your mortgage could impact your credit score, said Gerri Detweiler, education director for Nav, which helps business owners build and monitor strong business credit.

“Each credit check results in an inquiry on the credit report reviewed,” Detweiler said. “A single inquiry may drop your credit score by around three to seven points, and multiple inquiries can add up.”

That said, many versions of FICO scores include a buffer that counts multiple mortgage-related inquiries as one, assuming they’re made during a limited time frame.

“To be safe, it’s a good idea to stick to two weeks or less as your time frame for shopping for your new mortgage loan,” Detweiler said. “Keep in mind that inquiries remain on your reports for two years, but most scoring models don’t take into account inquiries that are more than a year old.”

Will refinancing a mortgage hurt the average age of my credit accounts?

“Credit age makes up about 15% of your credit score,” Detweiler said. “It takes into account the date your first account was opened, the date your most recent account was opened and the average age of all accounts.”

FICO scoring models continue factoring closed accounts into credit age, she noted, so if you paid your previous mortgage on time for years, that payment history will remain on your account.

“On the other hand, you will have a new account, which can have some impact on the score,” Detweiler said.

How to make smart decisions before applying for a refinance

Before applying for a refinance, Detweiler recommended checking with all three major credit reporting agencies at least two months before you’re planning to take action. If you find any mistakes on your credit report, this will give you time to address them.

She advised against taking any major action — e.g., closing accounts or opening new ones — without consulting your mortgage professional first.

“Sometimes consumers will find that their attempts to boost their credit scores backfire,” Detweiler said.

Despite any impact on your credit, if refinancing your mortgage offers significant savings, she said it might be well worth it.

“And as long as you pay your new mortgage on time, there’s a good chance your credit score will recover in a short period of time,” Detweiler said.

The bottom line

Refinancing your mortgage is a major decision. There are plenty of factors to consider, including the amount your monthly payment will change, fees you’ll incur for the refinance and the impact on your credit score.

Make the best choice for your situation by evaluating the big picture, instead of focusing solely on lowering your current interest rate.

 

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