Refinancing your mortgage to a new loan can offer major benefits. You can potentially access a lower interest rate, reduce your monthly payment or shorten the term of your mortgage. But refinancing your mortgage can cause your credit score to temporarily dip in some scenarios. Here’s how refinancing can affect your credit score.
How Refinancing Your Mortgage Affects Your Credit Score
Hard Inquiries
When you apply for a refinanced loan, a lender will check your credit report and credit score. This query shows up as a hard inquiry on your credit report, and hard inquiries can temporarily diminish your credit score. Usually this dip is short-lived, and your credit score gets back to where it was – or higher – as you continue to pay your loan and other bills on time.
But multiple hard inquiries over a few months can cause a more lasting impact. To prevent this from happening, it’s a good idea to shop around for the best refinancing in a short time frame and avoid dragging the process out for months. Most credit scoring models treat loan inquiries of the same type within a short time frame as a single hard inquiry.
Closing Older Accounts
When your mortgage is refinanced, the old loan is closed out and a new one is created. This can negatively affect your credit score because it may lower the age of your accounts. The FICO® Score model can use length of credit history to calculate 15% of your credit score. The model can use the following three factors to determine the length of history:
- The length of time your accounts have been open, including your oldest account, newest account and average age of all accounts.
- The length of time each specific account has been open.
- The length of time it’s been since you’ve last used each account.
If you’ve had your current mortgage for a long time, closing it out can impact the age of your oldest account and/or lower the average age of every account you own. But if the account you’re closing is in good standing, the damage to your credit score can be lessened.
Make Final Payments On Time
Refinancing your mortgage doesn’t deal a major blow to your credit score as long as you continue to make all your payments on time. Remember, the lender for your new loan may tell you to skip your last payment or two on the old loan because the new loan can take care of them. However, if the new lender’s payment arrives after your payment is due, you might see a late payment on your credit report. Make sure that your final payments are made on time.
