Does Refinancing a Mortgage Affect Your Credit Score?
Does refinancing affect your credit score? Short answer: yes.
When you refinance your mortgage, you’re replacing it with a new loan, and any new loan will impact your credit score. Your score will probably drop at first, sometimes by just five points or less, but it should rebound as time goes on if you make on-time payments.
Still, the benefits of refinancing a loan could be worth the (usually temporary) dip in your credit.
- Refinancing your mortgage can hurt your credit score temporarily, but usually only by a little.
- How refinancing affects your credit can depend on your credit history and other factors.
- Benefits of refinancing might outweigh the hit to your credit score.
How can refinancing a mortgage hurt your credit score?
Requires a hard credit pull
A lot of lenders let you check rates without hurting your credit. This is called prequalification. But if you want to move forward with refinancing your mortgage, the lender will then run a hard credit pull when you apply.
A hard credit pull will knock five points or less off of your FICO score, in most cases. If your credit report shows a lot of credit inquiries in a short period of time, the damage could be worse. The same goes if you don’t have much of a credit history.
Hard credit pulls usually show on your credit report for two years and affect your credit score for one year.
Take advantage of the rate-shopping window. When it comes to mortgage refinancing, only one hard pull will count against you if you get your pulls done within a set time, often 14 days or longer.
Get your own credit report card and check your credit score for free with LendingTree Spring. We’ll show you how you’re doing on each of the factors that affect your credit, like payment history and credit utilization. Plus, we’ll give you personalized recommendations on how to improve your score.
Changes the length of your credit history
Your credit score is calculated using a few metrics. The length of your credit history is one of these, and it makes up 15% of your FICO score. The longer your history, the better.
When you refinance, you will close your current mortgage loan and open a new one (your refinance loan). This could shorten your credit history. Mortgages generally last for 15 to 30 years, so it might be your oldest open account.
Appears on your credit report as a new loan
How much new credit you have makes up 10% of your credit score. Although this is just a small percentage, adding a lot of new credit cards and loans in a short amount of time can hurt.
Can increase how much debt you owe
Some types of mortgages (such as a cash-out refinance) let you borrow more than what you owe on your mortgage. Your refinance loan will be bigger than your original mortgage, which means more debt for you.
Amounts owed — how much debt you currently have — accounts for a whopping 30% of your FICO score.
The single biggest credit score factor is your payment history (35%). If you refinance a loan, keep making payments on your original loan until your refinance is complete.
Refinancing a house usually takes more than one billing cycle. You don’t want to damage your score by sending your mortgage payment to the wrong lender or by missing it completely.
How can refinancing a mortgage help your finances?
Might qualify for a lower interest rate
If rates have dropped or you’ve improved your credit since buying your home, you could qualify for a lower mortgage refinance rate.
Your refinance interest rate doesn’t need to be dramatically lower for refinancing to pay off.
Let’s say you got a $350,000 30-year mortgage in late 2023, with a rate of 7.79%. Suddenly, you qualify for a 30-year refinance loan at 6.79%.
And say that your refinance loan is also for $350,000 (though it would likely be less), and that it comes with 2% closing costs.
In that case, you could save over $46,000 in interest over the life of your loan.
You can use a mortgage refinance calculator to see if refinancing will work for you.
Could lower your monthly house payment
When you refinance your mortgage, you will choose a new loan term. Your loan term is the length of time you have to pay off what you owe, and it has a huge impact on your monthly payment.
Your monthly payment could go down if your refinance loan is the same length or longer than your current mortgage. That’s because you’ll have more time to spread your payments across.
However, you will probably pay more total interest over the life of the loan.
Can help you pay your mortgage off faster
Refinancing to a shorter-term mortgage can help you pay it off faster, with less overall interest. Plus, interest rates are usually much lower on a 15-year mortgage than they are on a 30-year.
But remember that if you pick a shorter-term mortgage, your monthly payments may be higher since you’ll have less time to pay off what you owe.
Can give you access to cash
When you take a cash-out refinance, you’re not only refinancing your mortgage but also borrowing from your equity (ownership) in your home.
A cash-out refi can be a great option if you qualify for a lower rate and are in the market for a new loan or credit card.
Cash-out refinances tend to carry lower rates than credit cards and personal loans, since a cash-out refi is tied to your house.
Frequently asked questions
It’s impossible to know exactly how much refinancing will affect your credit score — credit scores are as unique as a fingerprint, and many factors affect them. But generally, most people can expect their credit score to drop five points or less from a lender’s hard credit pull.
Even if refinancing does have a negative impact on your FICO credit scores from credit reporting agencies, you should see improvement after making on-time payments (and avoiding new debt) for a while.
Refinancing can feel like you’re starting your loan over again, but that isn’t quite true. When you refinance, you are getting a new loan and using it to replace your current loan. The clock may restart, but the part you paid off is still paid off.
For example, imagine you have 10 years left on your mortgage and you refinance to a 15-year loan. In that case, it’ll be another 15 years before you’ve paid it off (instead of the original 10), but your payments will almost definitely be lower.
Your payment can go up when you refinance if you have a higher interest rate and/or a shorter loan term.
A higher monthly payment doesn’t always mean the refinance was a bad deal. Some people refinance to a shorter loan term in order to pay their loan off faster. This results in a higher monthly payment.
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