Does Refinancing Your Mortgage Impact Your Credit Scores?
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Refinancing a mortgage is the process of taking out a new home loan and using that loan to pay down the balance on your original mortgage. Refinancing can be a great opportunity to change the terms of your loan: You might refinance to shorten the duration of your loan or, more commonly, to secure a lower interest rate. If interest rates have dropped significantly since you first took out your mortgage, your long-term savings could be substantial.
However, keep in mind that, despite the benefits of an adjusted loan, a mortgage refinance could have a negative impact on your credit scores. Here are three things to know about your credit reports before you begin the refinancing process:
1. A refinance can appear on your credit reports as a new loan
When you refinance your mortgage, you’re essentially paying off the old loan in full and opening a new one. Because your credit scores reflect how long different accounts have been established, as well as the most recent activity on each account, refinancing has an impact.
The overall duration of your credit history is factored into your credit scores. If your original mortgage is your longest-held account, closing it in favor of a fresh loan may negatively impact your credit scores, at least initially. Over time, as your other credit accounts age, the impact of a refinance on your credit scores will generally lessen.
2. Multiple credit inquiries can affect your credit report
When you refinance, you’ll generally want to shop around with different lenders to find the best loan terms possible. However, remember that when you apply for a loan and the potential lender reviews your credit history, it results in a “hard inquiry” on your credit reports. Hard inquiries remain on your credit reports for 24 months and may affect your credit scores, depending on your credit history and borrowing habits. To help minimize the number of hard inquiries on your credit reports, start by researching lenders and rates online and then make a short list of the ones with which you’ll apply.
Before you start shopping, it may be worth your time to pull a copy of your credit report to get a sense of how you’ll look to potential lenders. Through April 2021, you can receive one free credit report a week from each of the three nationwide credit reporting agencies (CRAs) through AnnualCreditReport.com. You can also create a myEquifax account to get six free Equifax credit reports each year. In addition, you can click “Get my free credit score” on your myEquifax dashboard to enroll in Equifax Core Credit™ for a free monthly Equifax credit report and free monthly VantageScore® 3.0 credit score, based on Equifax data. A VantageScore is one of many types of credit scores available to consumers.
Review all the information on your credit reports for accuracy before you begin applying for a refinance.
3. Skipping mortgage payments during the refinancing process can damage your credit scores
Refinancing your mortgage may take longer than you expect, so don’t count on the process closing by a certain month. Some borrowers have gotten into trouble by skipping a mortgage payment when they (incorrectly) assumed their refinance would go through. A missed or late payment can negatively impact your credit scores.
The best way to avoid delinquent payments is to stay in constant communication with your lenders and set reminders for yourself to avoid missing important due dates. Make payments toward your original mortgage as you usually would until your refinance is closed. Remember that payment history generally accounts for the largest portion of your credit scores, and missed payments can remain on your credit reports for seven years after the delinquency.
Even after your refinance is complete, it may take several months for the new account to appear on your credit reports. If you give it time and the loan still doesn’t show up, make sure your lender is reporting your payments to the three nationwide credit reporting agencies. The refinancing process has some impact on your credit scores, but how you handle the new loan will be more important in the long term.