Key Takeaways
- Mortgage refinancing lets you take a new loan to pay off an existing loan
- Refinancing your mortgage can temporarily lower your credit score
- Refinancing your mortgage to better terms helps your credit health in the long term
Are you struggling to keep up with your mortgage payments? There are ways to lower your monthly payments to make it easier to cater to your monthly expenses or set aside more money for your savings account.
Mortgage refinancing is one method you can use to achieve this goal. Refinancing your mortgage to another loan with a lower interest rate or reduced monthly payments may be a viable option. However, it is important to understand how mortgage refinancing can impact your credit score before applying for it.
Today, we will discuss how refinancing can lower your credit score in the short term and its long-term impact if you use mortgage refinancing wisely.
What is Mortgage Loan Refinancing?
Refinancing refers to taking out a new loan to pay off the debt for an existing loan and modifying the loan terms to make the loan easier for you to manage. Refinancing lets you negotiate lower interest rates and monthly payments by extending the loan repayment term. It can also help you consolidate several loans into one loan, effectively streamlining the process of repaying your debt.
How Mortgage Refinancing can Lower Your Credit Score
Refinancing any loan, including mortgages, can reduce your credit score due to three major factors:
Hard Inquiry on Credit Report
Lenders do not approve your mortgage refinancing application right away. When you apply for it, the lender will check your credit score and history through a hard inquiry on your credit report. Of course, the long-term savings on interest outweigh the impact of a temporary dip in your credit score.
Multiple Loan Applications
When applying for mortgage loan refinancing, you might apply to several lenders to find the most favorable loan terms to see which lender gives you the best interest rates and overall loan terms. Several applications result in more hard inquiries, resulting in a more significant impact on your credit score.
Closed Account
Refinancing a loan means effectively closing that loan account to open another one. Closing accounts can also lower your credit score since you shut down a long-term credit account. The impact of closing the account might be lower if you had a good payment history for your original mortgage.
When is it Wise to Refinance Your Mortgage?
Refinancing a mortgage or any other loan can hurt your credit score. However, it is not necessarily a bad decision. Refinancing your loan can help you substantially improve your credit score in the long run. Lowering your interest rate and monthly payments might lower your credit score in the short term, you can improve it as you continue making all your payments under the new loan terms.
It is a good idea to refinance your mortgage if you’ve seen significant improvements in your credit score and can qualify for a loan with more favorable terms. You can also consider refinancing your loan if interest rates are lower than when you took the original loan.
However, you must remember that refinancing a mortgage comes with closing costs, including appraisal costs, title insurance, credit reporting fees, and an origination fee. The costs can account for up to 6% of the total mortgage
Steps After Refinancing a Mortgage
Getting lender approval on your mortgage refinancing application does not mean you can immediately stop making payments on your original loan. You must continue making payments on the existing mortgage until the mortgage refinancing is complete.
Refinancing a mortgage can hurt your credit score initially, but it helps in the long run by reducing your monthly payments and allowing you more flexibility with your monthly spending. Be sure you understand its overall impact before applying for mortgage refinancing. You can get instant quotes and compare your options by simply clicking on one of the below offers.
Updated February 14, 2023