Does Refinancing Hurt My Credit Score?

Refinancing can be a good idea if your current mortgage is forcing you to pay a high interest rate. By refinancing your existing loan, you can take advantage of lower interest rates. However, before you jump at the chance to pay less in interest, you may want to consider the effect that it could have on your current credit score.

What is refinancing?

Refinancing is a process in which you take out a second mortgage that contains better terms than your first mortgage. You then use that second mortgage to completely pay off the first mortgage, leaving you with only the second loan to pay off. You can end up saving money by doing this.

Can refinancing hurt your credit score?

There are some cases in which refinancing your mortgage could end up doing a bit of damage to your credit score. This isn’t something you’ll want to take lightly, especially if you’ve worked hard to maintain a strong credit score. The following are some of the ways in which refinancing could potentially hurt your credit score:

Credit checks

When a lender checks your credit score, it appears on your credit report. The problem is that the more often your credit score is checked, the more of a negative impact it can have on your score. This can be an issue if you’re shopping around for different refinancing options in order to compare terms.

Whenever you apply for a loan of any kind, it results in a hard inquiry that lowers your score by a few points. Fortunately, to remedy this issue, FICO changed its scoring system a little bit to avoid penalizing you too harshly. If you submit all of your applications within a single 30 to 45-day period, it will treat all of these inquiries as a single credit pull, so it won’t have as big of an impact on your credit score.

Paying off your old loan

It’s good to have some debts on your credit report – as long as you are paying them off on time, of course. It allows for a long-standing payment history on a single debt.

However, if you pay off your old mortgage using a refinancing loan, you lose that established debt and you replace it with a newer debt that doesn’t have a steady payment history yet – this can end up being worse for your credit score.

Cash-out refinance

A cash-out refinance is when the loan is more than what’s needed to cover your original mortgage. The difference is then given to you in cash. Not only could you affect your credit score by paying off your older mortgage, but the larger loan balance could also increase your credit utilization ratio, which makes up 35 percent of your FICO credit score.

Refinancing your mortgage could end up affecting your credit score in a negative way. However, if the benefits outweigh these potential negatives, then it’s still probably worth doing. If you need professional refinancing advice,¬†contact¬†Alex Echeandia today.

 

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