With mortgage rates still at nearly historic lows, it is a good idea for homeowners to consider refinancing. If you have a higher interest rate mortgage, refinancing can often save you 100s of dollars on your monthly mortgage payment.
Despite the many benefits of refi, some homeowners are afraid to refinance their mortgages for fear of damaging their credit scores. What is the truth about refinancing and credit scores?
Like any loan application or credit inquiry, a refi will impact your credit score. For the most part, however, the savings that most homeowners will see from the refinance far outweigh the small impact the refi application will have on your credit score. According to the website, The Mortgage Report, the credit hits from applying for and opening a refinance loan are very small — often “less than five points,” according to FICO.
Refinancing might lower your credit score by just a few points, but that’s inevitable when shopping for any new loan or credit account.
There are two reasons refinancing affects your FICO score:
- Length of credit history — FICO monitors the age of your oldest credit account and newest account and averages out the age of the others. So think twice before opening or closing any account, especially credit cards you’ve had a long time. Closing your current mortgage may have little impact if it’s only been in existence a few years.
- Soft and hard inquiries for new credit — When you check your own credit or a monitoring service does it on your behalf, that’s a ‘soft credit inquiry,’ meaning your score is unaffected. But when you apply for new credit, that’s a ‘hard credit inquiry,’ and your score takes a small hit. FICO says for most borrowers. The hit’s likely to be “less than five points.” As long as you run all your accounts properly once the new one is in place, your score should be back to normal within a few months of your refinancing.
Also, note that Experian, one of the Big Three credit bureaus, says many credit scoring technologies will continue to consider the payment history on your old mortgage even after you close it. That can minimize the negative effects of closing your old loan. But be sure your current loan is in good standing when you refinance.
For most folks, refinancing should have few, if any, lasting effects on your credit score.
In fact, in some cases, refinancing your mortgage may actually help your FICO score. If you’re stuck with an unaffordable home loan and high mortgage payments are preventing you from paying down other debts, refinancing into a lower monthly payment could do you a world of good.
Imagine if you could lower your monthly mortgage payment by a few hundred dollars by refinancing, then you could stop making minimum credit card payments and actually start paying down your debt.
The bottom line is, your credit score affects your refinance a lot more than your refinance affects your credit score. That’s because a higher credit score can lower your mortgage interest rate substantially, whereas a low score typically means paying a higher rate.
As CNBC puts it, “As long as your interest rates are high, you’re putting less money into equity and assets and more money into servicing debt. And debt has no return on investment.”
In short, making smart credit moves and keeping your score up before you refinance can save you a lot of money in the long run.