Does Refinancing Your Mortgage Hurt Your Credit?
Updated: Feb 26, 2020
Many homeowners are looking at the growing equity in their property, competitive interest rates, as well as a strong economy and considering the opportunity to refinance while these factors continue to align. If you’re one of these homeowners who’s also been particularly conscious of your FICO, you may wonder how refinancing will affect your credit score.
These scores range from 300 - 850, with 670 being the average. As you may recall, we’ve previously discussed the importance of your credit standing via FICO – short for Fair Isaac Corporation – and how it’s impacted by late payments, collections, charge-offs, and excessive credit applications. Overdue payments and bad credit speak for themselves, but how does applying for new credit change your score?
When you apply for a new credit card or check to see if you qualify for refinancing, the company, bank or lender will pull your credit report from one or more of the major reporting agencies. These applications make up 10% of FICO scores and are referred to as “hard inquiries.” New credit inquiries by prospective lenders will influence your rating.
Will Refinancing Hurt Your Credit?
The good news is, the credit industry recognizes and respects that a savvy homeowner or home-buyer will make several inquiries to find the best rates and programs. In fact, they encourage it.
The time frame is key. If multiple credit checks are made in a period of approximately 14 to 45 days, it will count as one inquiry when adjustments are made to the rating. Conversely, if several mortgage inquiries – new purchase or refinance – are spread out over a few months they would be counted individually and could reflect negatively on the FICO rating.
Credit card inquiries are considered differently, however. The reporting agencies may see several applications as potentially adding more high-risk debt and your rating will reflect that concern.
A hard inquiry will stay on your report for two years and could affect your score for the first year, but minimally, if it’s not one of many. Depending on your credit profile, it may lower the score by 5 to 10 points, which will most likely rebound in a matter of months with good credit practices.
Likewise, your credit score may drop after refinancing your mortgage but on-time payments will keep your FICO in check. If you’re doing a cash-out refinance with the intention of lowering your mortgage payment through lower interest rates, or in order to consolidate your credit card debt, the long-term benefits could potentially correct any initial dings to your score.
You’re allowed one free credit report each year so it’s a great idea to see where you stand and avoid any surprises before beginning the inquiry process. It goes without saying, that a strong credit rating will not be negatively impacted by hard inquiries and replacing an original mortgage with a refi. However, even an average FICO score won’t suffer permanent damage if you’re proactive and credit-savvy.
Refinancing can provide many benefits to homeowners and EnTrust Funding (ETF) is eager to help you decide if the timing is ideal and what our best program is for your individual situation. Contact us today for more information on pursuing your goals and protecting your credit standing.