Does Refinancing A Mortgage Hurt Your Credit? It Can. But, Here’s How To Avoid It

Read Time: 5 minutes

Have you ever thought about refinancing your mortgage? If mortgage rates have dropped, it could help you save thousands of dollars in interest over the life of your loan. It can also allow you to shorten your mortgage term to pay off your loan sooner.

While refinancing can have many benefits, there are things you need to consider before proceeding, including whether refinancing a mortgage will hurt your credit. It can, but it’s not as bad as you might think. Keep reading to learn more. 

Key Takeaways

  • Refinancing a mortgage can decrease your credit score, but the effects are typically minimal and short-lived.
  • If you submit multiple mortgage refinance applications within a 14-day window, it will only show as one hard inquiry, minimizing the drop in your credit score.
  • Skipping mortgage payments while you refinance can significantly impact your credit score.

Why Does Applying For a Mortgage Refinance Impact Your Credit?

When you decide to refinance your mortgage, you’ll go through the application process like when you received your initial mortgage. And because you’re attempting to access additional financing, credit bureaus can see this as a negative, dropping your credit score.

But this isn’t just the case when you refinance a mortgage. The same applies if you’re refinancing an auto loan or applying for a personal loan to consolidate high-interest debt.

When you refinance your mortgage, there are a few reasons why you’ll see a drop in your credit score. Let’s look a little deeper into these reasons.

Hard Inquiries

Whenever you apply for a loan, whether a mortgage, car loan, or credit card, the lender will do a hard pull on your credit report. This allows them to dig deeper into your financials and borrowing history to understand your creditworthiness.

However, when this hard credit inquiry happens, it can tick a few points off your credit score. 

“Every time a lender checks your credit this way, it can affect your credit score. Shopping around for the best mortgage rate among several lenders may trigger multiple hard inquiries, which can cause a dip in your credit score,” cautions Alex Shekhtman, CEO/founder of LBC Mortgage.

On the bright side, the credit score decline is small and usually short-lived. Most inquiries will stay on your credit report for two years, but their impact is only felt for a year or less. 

A Refinance Is Seen As a New Loan

Refinancing a mortgage can also reduce your credit score because credit bureaus view it as a new loan replacing an old one. Because 15% of your credit score consists of your length of credit history, replacing something old for something new decreases your average account age. 

Even though you might have proven yourself as a qualified borrower in the past, the lender doesn’t have any history to go on for your new loan, making it riskier for them. However, as you make on-time payments and continue to pay down the balance, your credit score will improve.

You Miss Payments on Your Current Loan

One of the biggest mistakes people can make when refinancing their mortgage is missing a mortgage payment. Unfortunately, refinancing isn’t quick and can extend beyond when you’re approved.

When this happens, you must keep paying your current loan until your new loan closes. Missing payments can cause significant drops in your credit score.

How Much Does a Refinance Impact Your Credit?

The impact on your credit score when you refinance will depend on a few factors. It’s possible that you could see your score drop by only a few points or by a significant amount.

When a hard inquiry is done during the application process, your credit score will drop anywhere from two to five points. However, if you start the process with multiple lenders to see who will offer the best rate, the inquiries can start adding up, which would cause your credit score to drop further.

The one caveat is if all the inquiries are done within a 14-day period. This would mean a single hard inquiry instead of multiple.

If your current mortgage is one of your oldest debts, this might cause the biggest drop in your credit score. Because credit history makes up 15% of your score, replacing a mortgage you’ve had for many years can reduce your average credit age.

The exact drop will depend on your individual situation; it could be 20 points or more.

Tips To Avoid a Drop In Credit Score

Before refinancing your mortgage, consider a few things to protect your credit score.

Check Your Free Credit Reports Before Shopping

Before applying for a new loan, ensure you understand your credit report. You can use AnnualCreditReport.com to get a free credit report each year. Doing this will allow you to spot errors on your credit report before refinancing. 

Research Multiple Lenders

The best way to ensure you get the best deal is to shop around with multiple lenders. However, you’ll want to do all your comparison shopping within 14 days. This way, you’ll have only one hard inquiry instead of multiple. 

Ask The Lender To Do a Soft Pull

You could also talk to lenders about doing a soft credit pull on your credit in exchange for a rate quote. This would allow you to compare lenders without the credit score drop from a hard inquiry.

Shop and Apply For Refinance Loans Within a 14-day Period

When you apply to refinance a loan, lenders will do a hard credit pull to check your creditworthiness. Each hard credit pull will reduce your credit score by a few points.

However, if you compare lenders, all credit inquiries within 14 days will only count as one hard inquiry.

Collaborate With a Mortgage Broker

Instead of working with one or two mortgage lenders to find the best deal, you can use a mortgage broker with access to many different mortgage products. Using your broker as a resource, they can help guide you through the process to make sure you minimize any drop in your credit score.

Avoid Credit During Refinancing

While getting ready to refinance your mortgage, avoid making large purchases that can affect your credit usage. Increased credit usage can affect your credit score, making the process of closing a little more difficult.

Sean Bryant

Sean Bryant is a Denver-based freelance writer specializing in personal finance, credit cards, and real estate. With more than 15 years of writing experience, his work has appeared in many of the industry’s top publications including Time and Investopedia . He holds a Bachelor of Arts degree in economics.

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