Does refinancing a mortgage hurt your credit?

If you’re considering a refinance, you might be thinking about what impact the change in your mortgage can have on your wallet and financial profile. It’s natural to wonder: Does refinancing your house hurt your credit? How many times is your credit pulled when refinancing? What kind of credit score drop after refinance activity can you expect? Read on to learn helpful answers and details.

How refinancing a mortgage impacts your credit score

Even though there are many long-term benefits of refinancing your mortgage, there are a few ways refinancing can make a shorter-term dent in your credit score.

“Any application for a loan or credit will have an impact on your credit,” says Melinda Opperman, chief external affairs officer of the nonprofit Credit.org. “How strong that impact is will vary a lot depending on many factors.”

To help you get a feel for the impact, it can be helpful to know how much the FICO score — the most commonly used credit score — weighs various considerations. Here’s a look at the evaluated data groups and how much they matter:

• Payment history: 35 percent
• Amounts owed (i.e., total debt): 30 percent
• Credit history length: 15 percent
• Credit mix: 10 percent
• New credit: 10 percent

So, does refinancing hurt your credit? Short answer: Yes. But actually, there are several ways in which a mortgage refinance can impact your credit score.

Credit inquiries

Whenever a mortgage lender conducts a hard credit check to see if you qualify for a refinance, that inquiry is recorded on your credit report.

Credit inquiries affect your credit score for one year or less (potentially even only a few months) and remain visible on your credit report for 24 months. If you already have a few of these “hard pulls” on your report, any new ones will keep your score down until two years have passed.

“For most people, one additional inquiry will take less than five points off their FICO scores,” says Opperman. “However, as you get multiple inquiries, it starts to add up, as inquiries account for 10 percent of your total FICO score.”

Length of credit history

As we mentioned above, the length of your credit history — that is, how long you’ve had all your various loans and accounts — comprises 15 percent of your FICO score. That includes your mortgage. When you refinance, you’re basically replacing the old, existing mortgage with a new, younger one. “So, you effectively shorten the age of your average credit account,” says Opperman.

If your current mortgage was one of the first debts you incurred, refinancing to a new one can have a significantly negative effect on your score. Check the age of your lines of credit and credit accounts. If your current home loan is your oldest by far, you should be prepared for a fairly big dip after your refinance.

Juggling multiple new loans

Applying for several types of loans at once can drive down your credit score faster than if you were focusing solely on doing a mortgage refinance, notes David Battany, executive vice president of Capital Markets for Guild Mortgage.

“If the borrower is shopping for all sorts of debt — mortgage, car loan, credit card — then that pull would become a negative on their FICO score,” says Battany.

Now, that’s not the case if all your applications are home loan-related (more on that below).

Late or missed payments

When you’re refinancing and replacing one mortgage with another, it can be hard to keep track of how much longer you need to make payments on your old mortgage and when to start making payments on the new one. That confusion can result in delinquent or missed payments, which affect your credit score in a big way — payment history counts for 35 percent of your FICO. Regular communication with your lender can help you stay on top of when your payments are due and help you avoid a bigger credit score drop after a refinance.

Bigger debt load

If you’re considering doing a cash-out refinance, in which you’ll replace your old mortgage with a larger one (and take out the difference in cash), you could be adding to your debt load, cautions Battany.

“In that scenario, you have a greater possibility that it can hurt your FICO score,” says Battany. However, if you’re doing a cash-out refi to pay down revolving, unsecured debt, like a credit card balance, that’d ultimately have a positive effect on your score, he notes.

How rate shopping when refinancing affects your credit score

When you’re shopping around for refinance lenders, the credit bureaus figure you’re comparing offers, so your credit score won’t drop as much if you’re shopping different lenders within a short period. Under the new FICO credit model, any hard credit inquiries made within 45 days are treated as one inquiry for scoring purposes.

Typically, the impact on your credit score will be minimal. But if you’re worried about potentially lowering your score while evaluating refinance options, plan to do your loan shopping within a 45-day period.

How to protect your credit when refinancing your home

Does refinancing your house affect your credit? By now you should have a clear answer: yes, and not in a positive way. Although the impact of a mortgage refinance on your credit score is usually temporary, you probably want to take steps to avoid the drop as much as possible. Fortunately, there are ways you can help soften the blow post-refinance.

“There are scenarios where any negative impact can be quickly overcome, which can make refinancing a mortgage a good idea from a credit standpoint,” says Opperman.

• Give yourself 45 days. Remember: Even if you’re getting quotes from multiple lenders, your credit will only take one hit as long as you limit your comparison shopping to a 45-day window.
• Check your credit before. Check your credit score at AnnualCreditReport.com well before refinancing, Opperman recommends — rather than discover the number after a lender runs a hard inquiry. “Once you know your score, you can work to improve it,” says Opperman.
• Get an initial quote from lenders. Only hard credit inquiries affect your score — “soft pulls,” which go into less background, don’t. So you can ask refinance lenders to give you a preliminary quote based on one of these soft pulls, which tells them your credit score without actually pulling your full credit history. “Once you’ve narrowed the field down a bit, you can let the last few lenders do a full credit check and formally offer you a new loan,” says Opperman.
• Leave your credit alone. Aside from paying off outstanding balances, avoid making any big changes where your credit is concerned during the refinancing process. “Don’t buy a new car, get a new credit card or do anything that could impact your credit score while working toward your new mortgage,” says Opperman. If you do pay off a card, hold off on closing the account, as that could shorten your credit history length and hurt your score.
• Make timely payments on other debts. This is a time to be extra diligent about managing your other debt, from car loans to credit cards to your existing mortgage. Make sure no payments get lost in the shuffle as you apply for your refinance. You don’t want any missed or delinquent notices showing up on your record at this point.

Next steps to refinance your mortgage

Once you’ve made a plan for how to protect your credit during the refinancing process, there are a few steps you can take to help land the best refinance rate and terms:

1. Carefully consider “no-cost” or “zero-cost” refinance offers: A no-closing-cost refinance spares you a lot of immediate expenses for various fees. But it can mean paying more in the long run since the lack of these upfront costs is usually in exchange for a higher interest rate.
2. Request a range of rates: When gathering initial quotes, you should consider asking the lenders for a range for different scenarios, such as if you were to pay discount points or get a smaller loan. That can help you shop around and give you a sense of different options and the lender’s flexibility.
3. Explore government loan refis: If your credit is in rough shape, government-backed options like FHA loans and VA loans may still make it possible for you to refinance, as their lending criteria are often more lenient. However, your existing mortgage must be with one of these agencies; they won’t refinance conventional loans.
4. Use APR to compare offers: The annual percentage rate (APR) on a refinance offer reflects the true cost of the loan — including fees — and can provide a more accurate basis for comparing offers.
5. Consider your reasons for refinancing: Ask yourself what your goals are for refinancing your mortgage. Ideally, the long-term gains of refinancing would outweigh any short-term blemishes to your credit.

FAQ about mortgage refinancing and your credit

• Does refinancing multiple times hurt your credit?

  The number of times you refinance your mortgage shouldn’t do any compounding damage to your credit when you wait at least one year before you refinance again. This will make it so that the new round of credit inquiries won’t accumulate with the first time you refinanced, Opperman says. “Ultimately, the main reason not to refinance too often isn’t your credit score; it’s simply how expensive refinancing is, and how long it takes to recoup the savings you might get on your mortgage payment.”
  
  
  It’s worth noting that if your credit score was in good shape when you got your mortgage or after your last refinance, and it’s remained that way, you should be able to get a good rate again. Of course, you’ll want to make sure interest rates have stayed steady or, better yet, gone down in the meantime. If rates are on the rise, it’s usually not the best time for a refinance.
  

• How long does it take for credit to go up after a refinance?

  Typically, your credit score begins to increase sometime between a few months and a year after refinancing. However, evidence of the lender’s credit check stays on your report for two years.
  

• How many times is your credit pulled when refinancing?

  Usually, lenders will check your credit twice when refinancing: once when you formally apply for the new mortgage — to determine what APR to give you, based on your borrower profile — and again right before the closing, to make sure nothing has changed in the interim. If you can complete your refi process in 45 days or less, though, those inquiries get bundled together, helping to reduce your credit score drop after the refinance.