Mortgage refinancing can affect your FICO credit score in a few different ways, according to FICO, the analytics software company that produces the well-known scores. However, any impact would likely be small and short-lived compared to possible changes caused by the way you handle your mortgage payments for the duration of the note.
Refinancing might become problematic for your credit score if you are constantly refinancing or applying for new credit related to your mortgage. FICO might penalize you for being unable to honor a credit contract or for having too many inquiries on your credit report.
Rate shopping for a refinance on your current mortgage can result in multiple credit inquiries in a short period. Fortunately, back in 2009 FICO and other credit scoring systems changed the way multiple inquiries are treated on your credit score for certain kinds of debt, such as mortgages or student loans.
If you are going to shop around, FICO recommends submitting all of your applications within a 30- to 45-day period. Even if you do not end up accepting a new loan, FICO treats all of your inquiries as just one “credit pull,” minimizing the impact on your score. However, the Consumer Financial Protection Bureau recommends that you try to limit the inquiries to a two-week period, as some lenders still use older FICO scoring models.
Old mortgage accounts are technically paid off with a refinance loan, meaning you could potentially miss out on some credit benefits by replacing a long-standing payment history on one debt. Older, established and consistent debts are considered more valuable than new or irregular debts. Newer debts without that steady payment history, even if you are making payments for the same asset, are still worse for your credit score.
Cash-out refinances can have two adverse impacts on your credit score. One is the replacement of old debt with a new loan. Another is that the assumption of a larger loan balance could increase your credit utilization ratio. The credit utilization ratio makes up a significant portion of your FICO credit score, up to 30%, according to FICO. Generally speaking, the larger your credit file and the smaller the impact on your overall debt levels, the less potential impact a mortgage refinance will have.
Jennifer Beeston, vice president of mortgage lending at Guaranteed Rate Mortgage, suggests a work-around for the problem of multiple inquiries for a refinance. Beeston says, “It is best to know your credit score and to shop lenders by giving them your score. Each lender does not have to run your credit. Once you have identified the lender you would like to work with, then have them run your credit and complete your refinance. Having one lender run your credit and refinance your home should not adversely affect your credit score.”
Mortgage refinancing can indeed affect your FICO score for the worse, so it’s wise to take some precautions. Avoid refinancing too often or applying too frequently for credit related to your mortgage. When you are rate shopping, limit your inquiries to a two-week window. Remember that older debt that has a steady payment history is better for you than newer debt. And avoid cash-out refinances if you can. Following these steps should keep your FICO score healthy, which, of course, is most helpful for mortgage refinancing. (For more, see Should I Refinance My Mortgage?)