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.
Too Much Mortgage Refinancing Is Not Good
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 Can Be a Problem
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.
- 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.
- Avoid cash-out refinances if you can.
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.
Older Debt Is Better
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 not as good for your credit score.
Your FICO score is determined by your creditworthiness in five areas: payment history (35%), current level of indebtedness (30%), types of credit used (10%), length of credit history (15%), and new credit accounts (10%).
Cash-Out Refinances Don’t Help
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 30% of your FICO credit score, 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. “It is best to know your credit score,” Beeston says, “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.”
The Bottom Line
Mortgage refinancing can indeed affect your FICO score for the worse, so it’s wise to take some precautions. Following our guidelines about not refinancing or applying for credit too frequently will help. So does concentrating credit inquiries when you shop mortgage rates to a two-week window and working strategically with lenders to avoid having too many of them run your credit. Also be aware that losing your record of paying an old mortgage on time could be harmful to your score, as can a cash-out refinance if you choose to do one.
Following these steps should keep your FICO score healthy, which, of course, is most helpful for mortgage refinancing.