How refinancing affects your credit score and vice versa

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Does refinancing hurt your credit score?

Credit crises are pretty much inevitable when you apply for a new credit account, open a loan, or close one. And refinancing your mortgage involves all of these steps.

However, credit successes associated with applying for and opening a refinance loan are very low – often “less than five points,” according to FICO.

The savings you are likely to see from refinancing should more than outweigh any negative impact on your credit. So don’t let that be a problem when you apply.

Check your refinancing eligibility (May 24, 2021)


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How refinancing affects your credit score

Refinancing can lower your credit score by just a few points, but it’s inevitable when shopping for a new loan or a new credit account.

There are two reasons why refinancing affects your FICO score:

  1. Length of credit history – FICO monitors the age of your oldest and most recent credit accounts, and averages the ages of others. So think twice before opening or closing an account, especially credit cards that you have had for a long time. Closing your current mortgage may have little impact if it’s only been in existence for a few years
  2. Simple and difficult inquiries for new credit – When you check your own credit or have a monitoring service do it on your behalf, this is a ‘soft credit check‘ which means your score is not affected. But when you apply for new credit, it’s a “ hard credit check ” and your score takes a bit of a hit. According to FICO, for most borrowers, success is probably “less than five points.” As long as you manage all of your accounts correctly once the new one is in place, your score should return to normal within a few months.

Also note that Experian, one of the Big Three credit bureaus, claims that many credit scoring technologies will continue to take your old mortgage payment history into account even after it has closed.

This can minimize the negative effects of closing your old loan. But make sure your current loan is in good standing when you refinance. More information below.

For the most part, refinancing should have little to no lasting effect on your credit score.

Can Refinancing Improve Your Credit Score?

In some cases, refinancing your mortgage can actually improve your credit score.

If you’re stuck with an unaffordable home loan and high mortgage payments keep you from paying off other debt, refinancing to a lower monthly payment could do you good.

Imagine you could reduce your monthly mortgage payment by a few hundred dollars by refinancing. Now you can stop making minimum credit card payments and start paying off your debt.

Some homeowners even use cash refinancing for debt consolidation.

This involves using home equity to pay off high interest debts, thus consolidating them into one low interest loan payment to save money on interest.

If done right, the positive impact these strategies could have on your score would be far greater than any negative impact of refinancing.

Check your refinancing eligibility (May 24, 2021)

How Your Credit Score Affects Your Refinance

Your credit score affects your refinancing much more than your refinancing affects your credit score.

This is because a higher credit score can dramatically lower the interest rate on your mortgage, while a low score usually means paying a higher rate.

As CNBC says, “As long as your interest rates are high, you invest less money in equity and assets and more money in debt service. And debt has no return on your investment. “

In short, making smart credit moves and maintaining your score before refinancing can save you a lot of money in the long run.

Credit ratings and refinancing rates

How Much Can You Save When You Refinance With A High Credit Score?

FICO has a page on its website that allows you to compare the costs of a mortgage based on your credit score. We ran a sample scenario using a 30-year fixed rate mortgage of $ 200,000 and average mortgage rates as of the day of writing.

Your own results will vary depending on your exact interest rate, loan amount, and location. But the general trend is clear: your credit score makes a big difference in your refinancing costs.

Range of FICO scores Monthly payment Total interest paid (30 years)
760-850 $ 803 $ 88,999
700-759 $ 826 $ 97,454
680-699 $ 845 $ 104,293
660-679 $ 869 $ 112,677
640-659 $ 916 $ 129,899
620-639 $ 979 $ 152,471

Of course, it’s not just your mortgage that you’ll pay more for.

Your credit score also influences the interest rates on auto loans, personal loans, credit cards, and other financial products.

So instead of wondering if refinancing will hurt your credit, you could look it the other way around: how can a mortgage – or refinance other debt at a lower interest rate – actually help your credit and improve your personal finances?

Check your refinancing eligibility (May 24, 2021)

Tips for Preserving Your Credit Score When You Refinance

Smart homeowners compare the rates of several different lenders when they refinance. If you want six quotes, does that mean your credit score takes six results?

Fortunately, no, getting multiple quotes won’t lower your score multiple times. FICO claims that its score “allows rate purchases”.

But, you have to be smart about how you shop to protect your score – and that means getting all of your quotes in a matter of weeks at most.

Comparison shop during a targeted period

To protect your credit score when you refinance, you must complete all of your underwriting applications within a targeted period. If you take several months to request quotes, each can be considered a separate serious investigation.

For FICO, a “target period” typically means getting your quotes within 30 days.

Newer versions of the FICO scoring model allow 45 days to purchase fares. But don’t take any chances. Many lenders use older versions of FICO to calculate your score.

So, as long as you complete all of your fare buying apps within 30 days, your score should only take a standard single hit of around five points or less – the same as someone who doesn’t. don’t shop.

Other measures to protect your credit

Experian brings up an important point for homeowner refinancing: you need to be absolutely sure that you make every payment on your original mortgage on time.

Especially if you have two mortgages at the same time, it’s easy to get confused about how much you owe who. And, even worse, your new lender can sometimes encourage you to forget about your last payment on your existing loan because your new mortgage will pay it off. But don’t do that.

Not all mortgage lenders are models of efficiency. And if your new payroll is just one day late, your credit score will likely be affected by late payment.

How your credit score is made up

We mentioned above that refinancing can impact two credit scoring factors: the length of your credit history and the number of indirect and difficult inquiries about your credit report.

But what impact do these things really have on your score?

To give you a better picture, here are all of the elements that make up your credit score – along with the weight given to them in FICO’s scoring model:

  • Payment history (35%) – Paying late bills or skipping payments can quickly ruin your credit
  • Amounts due (30%) – This is the credit card balance rather than your overall debt. Keep all card balances below 30% of their credit limit and you should be fine
  • Average age of credit accounts (15%) – The longer, the better. But that looks at your current loan. Thus, opening a new account or closing an old one makes your history shorter and your score lower.
  • Credit mix (10%) – This is your combination of “credit cards, retail accounts, installment loans, finance company accounts and mortgages”. You don’t need one of each, but a mix of revolving credit (mostly plastic) and non-revolving credit (installment loans, including those for cars and mortgages) increases your score a bit.
  • New credit (10%) – If you apply for many new accounts in a short period of time, you will send a red flag. But if you’re looking for just one new loan, like a refinance, and you get all of your quotes within 30 days, you’re only going to take a small hit.

So these are the factors that FICO (and other scoring technologies) consider in order of importance. The two areas impacted by refinancing are lower on the scale.

As long as you do it right, refinancing should only cause a small dent in your score – 5 points or less, in most cases.

What are the current refinancing rates?

Refinancing rates are still at historically low levels. But not all lenders offer the same rates. To find the best deal, you will need to shop with at least 3 to 5 mortgage lenders.

The good news is that getting multiple refinance rate quotes won’t hurt your credit score.

As long as you get all of your quotes a few weeks apart, they count as one request on your credit report. So don’t let credit worries keep you from shopping around and finding the best rate.

Check your new rate (May 24, 2021)



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