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How Refinancing a Mortgage Can Affect Your Credit

When you’re interested in reducing your mortgage rate and lowering your monthly mortgage payments, refinancing may solve some of your problems. While you’re going through the process of refinancing, you may forget to consider how it could affect your credit score. Here are a few things you’ll need to take into account before setting out to get a better deal on your home loan.

Your Lender Will Check Your Credit Report

If you apply for a refinance loan, your lender will check your credit score and your credit report. Having a lender review your credit information will trigger a hard inquiry. New credit inquiries show up on your credit report and account for 10% of your FICO credit score. Each new inquiry for credit can knock a few points off your credit score.

Generally, if you’re rate shopping within a small window of time (14 to 45 days), multiple loan applications will show up as a single inquiry on your credit report. On the other hand, if you spend several months applying for different refinance loans multiple inquiries will appear on your credit report. Your credit score may drop significantly, meaning that it’ll be harder to qualify for a loan or lock in the best rates.

Tapping Your Home Equity Could Negatively Affect Your Score

How Refinancing a Mortgage Can Affect Your Credit

If you’ve built up equity in your home, you might want to tap into it to complete some much-needed repairs or tackle a large-scale renovation. But by getting a home equity loan or a home equity line of credit, you’ll be increasing your debt load.

Thirty percent of your FICO credit score depends on how much debt you owe. If you take on more debt, you’ll increase your credit utilization ratio. Having a high debt-to-credit ratio can hurt your credit score and make you look like a risky borrower.

Closing out Your Old Mortgage Loan Could Work Against You

When you refinance a mortgage, you’re essentially paying off your existing home loan with a new one. When it comes to your credit score, the age of your credit accounts matters. In fact, 15% of your FICO credit score is based on the length of your credit history.

Having a long credit history can help you since it’ll give lenders a better idea of how you manage debt. As a result, closing out a mortgage that you’ve had for years could hurt your credit score, particularly if you’re taking out a new home loan at the same time.

Paying Either Mortgage Loan Late Could Spell Disaster

How Refinancing a Mortgage Can Affect Your Credit

Refinancing a mortgage takes time. And until you’ve signed off on your new loan, you’ll still have to keep up with the payments on your existing loan. Making a late mortgage payment can damage your credit score. In the worst-case scenario, your lender could cancel your refinance loan if a late payment causes your credit score to fall.

If your lender approves your application for a refinance loan, you’ll need to know when your first payment is due. Depending on when your loan closed, you may be able to “skip” a month or two before making your first payment. Generally, mortgage payments are due on the first day of every month. Your lender may offer a grace period but you’ll need to confirm that.

The Bottom Line

Refinancing can save you money if you can reduce your mortgage rate. But it’s important to consider how a refinance might impact your credit. Checking your credit report before and after you refinance is a smart move if you don’t want to be caught off guard by any surprises.

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Photo credit: ©iStock.com/Squaredpixels, ©iStock.com/kali9, ©iStock.com/elenaleonova

Rebecca Lake Rebecca Lake has been writing about the nuts and bolts of personal finance for nearly a decade. She is an expert in investing, retirement and home buying topics. Her work has been featured on The Huffington Post, Business Insider, CBS News, U.S. News & World Report and Investopedia. As a homeschooling mom of two, she's always looking for ways to make the most of every dollar.
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