How Refinancing Your Home May Impact Your Credit Score

Refinancing your home can be a savvy financial move, but the process can cause a temporary dip in your credit score. Understanding the key stages helps you navigate the potential impact.

1. Hard Inquiries: When you apply with various lenders, each will pull your credit report, resulting in hard inquiries. While multiple mortgage-related inquiries within a short window are often treated as one, they can still slightly lower your score.
2. New Account Creation: Successfully closing on a refinance means a new loan account is added to your credit history. This new account reduces the average age of your accounts, a factor that can temporarily bring down your score.
3. Closing the Old Mortgage: Your previous mortgage account will be closed once it's paid off by the new loan. While closing an account in good standing isn't inherently negative, it alters your credit mix and history.
4. Building New Payment History: The most significant long-term factor is your payment behavior on the new loan. Making consistent, on-time payments will help your score recover and can ultimately strengthen your credit profile over time.

How Much Will Refinancing Your Home Affect Your Credit Score?

Refinancing your mortgage can cause a temporary dip in your credit score. Here are the main factors that contribute to this change.

• Hard Inquiry. When you apply to refinance, lenders perform a hard credit check. This can lower your score by a few points, but the effect is usually short-lived.
• New Loan Account. Your new refinanced mortgage lowers the average age of your credit history. A younger credit age can temporarily have a negative impact on your score.
• Closing Your Old Mortgage. Paying off your original loan closes an established account. This can affect your credit mix and history, but the impact is typically minimal and temporary.

How You Can Avoid Refinancing Your Home Affecting Your Credit Score

Shop Within a Limited Timeframe

Credit scoring models often treat multiple mortgage inquiries within a 14 to 45-day window as a single event. By submitting all your refinance applications in a short period, you can effectively shop for the best rates while minimizing the impact of hard inquiries.

Maintain Healthy Credit Practices

During the refinancing process, continue paying all your bills on time and avoid opening new lines of credit. Consistent, responsible financial behavior can help offset the temporary, minor dip your score might take from the inquiry, ensuring a faster recovery to your previous score.

Ways to Improve Your Credit Score

Improving your credit score is an achievable goal that hinges on consistent, positive financial habits. According to an expert guide, most people can see meaningful changes within three to six months by following proven methods.

• Monitor your credit reports. Obtain free reports from the three major bureaus to identify and dispute inaccuracies, which can unfairly lower your score.
• Set up automatic bill payments. Your payment history is the most significant factor in your score, so ensuring timely payments is crucial for improvement.
• Reduce your credit utilization ratio. Aim to use less than 30% of your available credit, as high balances can signal financial distress to lenders.
• Become an authorized user. Being added to a credit card account with a long history of on-time payments can give your score a boost.
• Diversify your credit mix. Lenders like to see that you can responsibly manage different types of credit, such as credit cards and installment loans.
• Limit hard inquiries. Avoid applying for too much new credit at once, as each application can cause a temporary dip in your score.

The Bottom Line

Refinancing your home can temporarily lower your credit score due to a hard inquiry and a new loan account. This impact is generally minor and short-lived with a history of on-time payments.

Frequently Asked Questions

How much will refinancing lower my credit score?

A refinance application typically causes a small, temporary dip of five to ten points. Multiple inquiries within a short window are usually treated as a single event.

How long does a refinance inquiry affect my credit?

The hard inquiry stays on your report for two years, but its impact on your score significantly lessens after the first few months of on-time payments.

Can refinancing eventually help my credit score?

Yes, making consistent, on-time payments on your new loan demonstrates creditworthiness and can help improve your score over the long term by building a positive payment history.