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Does Refinancing Hurt Your Credit Score? Feature Image
Posted on April 25, 2022 6 minute read

Does Refinancing Hurt Your Credit Score?


What's in this article?

What is mortgage refinancing?
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How a mortgage refinance affects your credit score
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When should you refinance a home loan?
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How Homefinity can help
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If you’re a homeowner looking to refinance your home, you may be wondering, “Does refinancing hurt your credit score?”

The short answer is yes. Refinancing can impact your credit score and overall credit rating. 

Some homeowners experience a drop in their credit because of mortgage refinancing. But the good news is, your credit can quickly bounce back. 

Refinancing your existing mortgage loan can also offer a number of advantages, including:

  • helping you lower your interest rate, 
  • reducing the amount your pay monthly for your mortgage, 
  • adjusting the terms of your mortgage, or 
  • allowing you to access the equity you’ve built up in your home 

To make sure you make the right choice for your situation, it’s important to understand what’s involved in mortgage refinancing before you apply. 

What is mortgage refinancing?

Mortgage refinancing refers to when a homeowner takes out a new loan to pay off their existing mortgage, and then acquires a new home loan, sometimes with different terms. This usually leaves homeowners with a lower monthly payment. 

When qualified borrowers apply for a mortgage refinance loan, they can often negotiate better loan terms, such as lower interest rates, tapping into their home’s equity through a cash-out refinance, or improving loan terms. 

Borrowers can also use mortgage refinancing to consolidate their debt. They can make a single monthly payment rather than paying on multiple debts.

Has your credit score has improved since your old mortgage application? Could you benefit from receiving cashback? 

Mortgage refinancing can often be a wise financial choice for many homeowners. Especially if you’re struggling to meet higher monthly mortgage payments.  

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How a mortgage refinance affects your credit score

Refinancing your mortgage can lower your credit score in a few different ways. 

Hard credit inquiry

When you apply for refinance, your lender will run a credit inquiry and check your credit history and score. 

When you apply a for a new credit account, the lender checks your credit in direct response to your application. It’s called a “hard inquiry.” 

New credit accounts include:

  • Line of credit
  • Car loan
  • Credit card
  • Personal loan
  • Student loan

Hard credit checks can cause a drop in your credit score, but it’s only temporary. Especially if you otherwise have good credit and habits, such as making payments on time consistently. 

For many borrowers, the money saved far outweighs the temporary credit dip. 

Multiple mortgage refinance applications

To uncover the best mortgage refinancing terms, check out several different mortgage lenders to see what they can offer you.

While a hard credit inquiry can impact your credit score, you can prevent multiple applications from causing your FICO score to take a bit of a dip. 

And it isn’t complicated. 

Simply make all your mortgage refinance applications within a single timeframe. 

Most credit reporting bureaus use a similar scoring model that considers multiple refinance inquiries made between a two-week to 45-day period as a single inquiry. 

This single step can significantly minimize the impact of mortgage refinancing on your credit score. 

However, if you make multiple inquiries over several months or even a year, each inquiry will be treated individually, which can mean losing points on your credit score.

Closed account

When you get a new mortgage loan, your old loan account will be closed, and a new account will be opened for your new loan. 

Closing a credit account that you’ve held for a long time can affect your credit score. But some credit reporting bureaus use a credit scoring model that takes your credit history on that account into consideration. 

If your old loan account was in good standing, and there were no late payments or missed payments, closing the account may not impact your credit score as much.

How to improve your credit score after a refinance

By paying off your new loan, making all payments on time and for the full amount, your strong payment history will bring your credit score back up to where it was (or improve it).

When should you refinance a home loan?

Deciding the right time to refinance your mortgage loan will be different for everyone, but there are some general guidelines that can help you identify when the time is right. 

The best time to refinance a mortgage for most homeowners is when your credit score has increased significantly or when interest rates are lower than your original mortgage application.

To better understand your credit file, request a copy of your credit report (for free) before submitting a mortgage refinance application from any major credit reporting bureaus (Equifax, Experian, TransUnion).

Requesting a copy of your personal credit history is considered a “soft” credit inquiry and doesn’t hurt your credit score. 

Once you get your personal credit report, check for errors or mistakes and contact the credit bureau to update any inaccurate information. 

A credit report without errors allows lenders to see your actual credit file and help you get the best possible terms on your new mortgage loan.

What should I do after refinancing?

Refinancing your mortgage could negatively damage your credit score, so it’s important to make paying off your loan a priority. 

The quicker you begin making regular payments you’ll see improvements to your credit score.

The bottom line on the best time to refinance

If you can save money or reduce your mortgage payment, chances are it makes financial sense to consider refinancing.

When the market is favorable, borrowers can often save on paying interest over the lifetime of their loan. 

Homeowners who used FHA loans (loans guaranteed by the Federal Housing Administration) to purchase their home may be able to eliminate the high mortgage insurance premiums that accompany the mortgage.

Or homeowners who could benefit from a cash lump sum, accessing the money they’ve built up in their home accessing their home equity can be a great choice. 

Additionally, some homeowners find refinancing their mortgage before selling their home can lessen the expense of making upgrades or repairs.

However, it’s important to remember that, like your original mortgage, refinancing your home loan typically comes with closing costs, such as origination fees, title insurance, credit reporting fees, or home appraisal costs. 

Closing costs typically add between two and six percent of the total loan amount. 

How Homefinity can help

To start a refinance, you can apply online with Homefinity today. 

If you have questions about refinancing or aren’t sure whether now is the best time to refinance your mortgage, reach out to the home loan specialists at Homefintiy. 

We partner with you to ensure you get the best mortgage rates and most favorable terms available to suit your specific financial situation. 

Photo by RODNAE Productions

Fairway is not a registered or licensed credit repair organization.

Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.