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How to Stop Your Refinance From Negatively Affecting Your Credit Score Feature Image
Posted on March 29, 2023 5 minute read

How to Stop Your Refinance From Negatively Affecting Your Credit Score

What's in this article?

Refinancing basics
Refinancing counts as a new loan on your credit report
Late or missed payments
How to minimize the negative impact on your credit
How to apply for a refinance
Homefinity—your partner in refinancing

Dilemma: You need to lower your monthly mortgage payment but you’re concerned how it will reflect in your credit score. Will refinancing your mortgage negatively impact your credit? And how can you stop it?

Whether you’re looking to save money on your monthly payments or pay off your mortgage faster, we’ll help you understand how refinancing can impact your credit score and what steps you can take to minimize any negative effects.

Refinancing basics

Refinancing a mortgage involves replacing your existing home loan with a new, larger one to achieve better interest rates or loan terms. This can help you save money on your monthly payments or pay off your mortgage faster.

If you’re a homeowner considering refinancing your mortgage, you might be wondering if and how it affects your credit. 

Yes, when you apply for a mortgage refinance, it affects your FICO score. 

But refinancing can also have a number of benefits, including: 

  • Lower interest rates
  • Lowering your debt-to-income ratio
  • Lower monthly payments
  • Favorable new loan terms

Credit Inquiries

It’s important to also understand the potential impact on your credit score, such as a temporary dip of about 5-10 points. 

When you apply to refinance, lenders will have to review your credit report to assess your creditworthiness. This is called a hard inquiry and can cause a temporary dip in your credit score. It indicates that you are actively seeking new credit, which can be seen as a risk factor by creditors.

The impact of a hard inquiry on your credit score, however, is typically minor, only around five points, and will fall off in two years.

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Refinancing counts as a new loan on your credit report

When you refinance your mortgage, it appears on your credit report as a new loan, which can impact your credit score in a few ways. 

Refinancing means that you’re closing the previous loan and starting a new one. Your credit ratings consider recent activity on each account and how long each has been open.

Credit ratings are also influenced by the length of your credit history overall. If your old mortgage was your longest-held account, shutting it in favor of a new loan can initially hurt your credit score. 

The effect of a refinance on your credit scores will typically reduce over time as your existing credit accounts mature.

Late or missed payments

Refinancing a mortgage involves a lot of paperwork, communication, and coordination between the borrower and the lender. 

As a result, there is always a risk of late or missed payments during the refinance process, which can have a negative impact on your credit score.

One way that the refinance process can lead to late or missed payments is if there are delays in processing the new loan. 

If the lender is slow to process the application or has issues with the borrower’s paperwork, it can cause delays in the closing process, leading to missed payments on the current mortgage. 

Payment history is an important factor in credit scoring models, accounting for up to 35% of a borrower’s credit score. If the borrower misses a payment, their credit score could drop significantly, depending on the severity and how long it takes to get back on track.

How to minimize the negative impact on your credit

If you plan well, you can limit how much refinancing can negatively affect your credit card.

  • Boost your credit score before the refinancing process to secure a better rate and pay off one of your smaller loans or credit card debt. 
  • Avoid late payment of bills as this can have a significantly bad impact on your credit score and could result in late payment fees and interest charges.
  • Keep your credit card balances below 30% of your credit limit. High credit card balances can negatively impact your credit score, making it harder to pay off your debts and monitor your credit report. 
  • Regularly check your credit report to ensure that all information is accurate and current and monitor for errors or fraudulent activity on your credit card. 
  • Don’t open too many credit accounts in a short time, especially if you plan to refinance soon
  • Carefully consider each credit account that you close so as not to close too many at once

Free credit reports are available once a year from each of the three major credit bureaus. 

How to apply for a refinance

Once you’ve done everything you can to strengthen your credit, take the following steps to apply for a refinance.  

  1. Determine your goals: Before you apply, determine your goals for refinancing. This could be to lower your interest rate, reduce your monthly payment, shorten your loan term, or access equity in your home.
  2. Research lenders: Compare their rates, fees, and terms for refinance. You can check with your current mortgage lender as well as other lenders.
  3. Gather documentation: To apply for a refinance, you must provide documentation such as proof of income, bank statements, and tax returns. Gather all of the necessary documents before you apply to help streamline the process.
  4. Submit your application: Once you have selected a lender, you can submit your application. You must provide your personal and financial information and credit card details. 

Homefinity—your partner in refinancing

If refinancing is best for your situation at that time, don’t worry about the harm to your credit. It’s relatively simple for your credit score to bounce back once you refinance.

If you’re still not sure and have more questions, reach out to the experienced loan officers at Homefinity. We offer some of the lowest rates in the industry and make the mortgage refinance process quick and easy.

Don’t let the fear about your credit hold you back from savings each month. 

Refinance with Homefinity today.

Photo by Mikhail Nilov

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By refinancing your existing loan, your total finance charges may be higher over the life of the loan.