Refinancing your mortgage can reduce your monthly payments and the total that you’ll pay in interest over the life of the loan. When you apply to refinance, you should expect your credit scores to take a bit of a hit. The effect will be temporary, and your long-term savings should make it all worthwhile.
How Refinancing Can Impact Your Credit
When you apply for a new line of credit, whether it’s a mortgage, an auto loan, a personal loan, or a credit card, the financial institution will check your credit. A “hard inquiry” will typically cause your credit scores to dip by several points. The effect will generally last for a year or less.
To calculate your credit scores, credit bureaus consider several factors, including the average amount of time all your accounts have been open. If you refinance your mortgage, you’ll replace your existing loan with a new one. That can reduce the average age of your accounts. If your current home loan is older than most or all of your other accounts, refinancing might have a substantial impact on your credit.
How to Minimize the Effect of Refinancing on Your Credit Scores
One hard inquiry won’t affect your credit that much, but several hard inquiries in a short period of time can cause your scores to plunge. Don’t apply for another line of credit, such as a credit card or an auto or personal loan, around the same time that you apply to refinance your mortgage.
Before you refinance your home loan, you’ll want to shop around and request quotes from several lenders to find the best terms. If you get all those quotes within a 45-day period, only one hard inquiry will show up on your credit reports.
Closing an account can reduce the average age of all your accounts and negatively impact your credit scores. If you pay off a credit card, it can be in your best interest to keep the account open, even if you don’t plan to use it anymore. This can be particularly important if you pay off a credit card before you refinance your mortgage.
Focus on the Long-Term Benefits
Refinancing your home loan will most likely cause your credit scores to drop, but the impact should be limited and temporary. Don’t stress about it too much. Instead, focus on the advantages of refinancing. Switching to a loan with a lower interest rate or a different term can save you money in the long run and give you greater financial freedom and peace of mind.
