Does Refinancing Hurt Your Credit Score?

Last Updated: March 15, 2024

Does Refinancing Affects Your Credit Score?

How does refinancing affect your credit score?

A refinance is a loan for the purpose of paying off an existing mortgage. In most cases, you will still owe the same amount to your lender as before and there are no changes in terms that could affect credit scores.

A new lender may also request a copy of your latest bankruptcy or tax return on top of other information which can hurt credit score if not reported accurately.  Learn more in our  guide to hard vs soft credit pulls.

What should I do if my current home does not have enough equity to refinance?

If you don’t own enough equity, then refinancing might not be possible because lenders need at least 20% equity (20% down payment) in order to approve a new mortgage loan. You'll want to consider renting instead so long as it will give you some growth in the future.

Essentially, refinancing is a process that gives you access to new money and lowers your monthly payment without changing loan terms or risking your credit score.



You will still owe the same amount to your lender as before and there are no changes in terms that could affect credit scores.

The benefits of refinancing 

One of the benefits of refinancing is that it can lower your monthly mortgage payment. For example, say you took out a 30-year mortgage to buy a house 15 years ago and historically obtained an 8% interest rate for your loan.

Over time your rates may have risen to 9%. And overall, the home worth has increased over time too. So, reviewing your terms now can often make sense in lowering the price on your loan which means you pay less each month - thereby freeing up more cash flow or reducing financial stress.

Studies show that as much as 50% of homeowners move before their mortgages expire simply because they are attracted by low-interest rates offered by the new lender institution during this refinancing process.

The risks of refinancing 

The risks of refinancing are high and depend on your current mortgage situation. For example, you could benefit from a refinance if your current interest rates are at least 3 points higher than the rates on the new mortgage.

Overall, people who refinance wind up paying almost 20% more over the life of their loan with many incurring annual closing costs such as fees for an appraiser or credit report. 

A mortgage refinance not only lengthens the duration of your loan, but it also increases your monthly payment.

Refinancing may sound like a great idea because you will be able to save money in the long-term by refinancing for a lower interest rate and paying less on principal every month. However, if you are looking at short-term savings, then it may not be the best option for you.

If your credit score is excellent and if you have enough equity in your home to cover closing costs (at least 20% of the loan amount), a refinance might make sense so that you can take advantage of lower rates while they are still available.

While refinancing debt offers advantages, there are also considerable risks to evaluate:

• Closing costs like appraisal fees often reach into the thousands. These can outweigh interest savings.
• Extending the repayment timeline of a loan to reduce monthly costs means paying more interest overall.
• Multiple hard credit check inquiries when shopping rates can ding your score temporarily by 10-15 points.
• Closed accounts in good standing fall off credit reports after 10 years. This can shorten your credit history.

For example, refinancing a $200,000 mortgage from a 5% rate down to 3% could save roughly $68,000 over the life of a 30-year term. But if closing costs total $6,000, it would take over 5 years for monthly savings to outweigh the fees paid upfront. Evaluate both short and long-term costs.

Should I refinance now or wait until the rates drop? 

The answer to this question is determined by a few different factors.

1. You need to determine where the interest rates are now and compare them with the current rate that can be obtained elsewhere, such as on a mortgage/refinance. 
   
   
2. Look at how one's lifestyle will change in one of two scenarios: homeownership with low-interest rates or new homeownership with high interest rates. You'll want to weigh the pros and cons of each scenario before making your decision - such as how much more money will be spent on monthly mortgage payments vs. agent commission, property taxes, home equity loans if applicable, etc. 
   
   
3. Homeowners may also want to keep their eye on newer properties coming on the market. New properties are often priced lower than similar homes in a neighborhood with older, higher-interest rates mortgages.

How long will it take for me to refinance and how much money can I save by doing so?

The time it will take can vary depending on a number of factors, including the amount and type of property you are refinancing. Checking with a few different companies is wise before taking steps to refinance. You should be able to save an average of 5%-7% when refinancing your mortgage.

If you're looking for information about refinancing with Federal loans, there are easy-to-use calculators you can find online that will automatically calculate your savings if it is a federal loan. If not, we can't calculate it since we don't know what kind of loan you're seeking. 

Try this refinance calculator to find out how much it's going to cost you and what your monthly payments will be.

Refinancing Different Types of Debt

Refinancing can impact your credit differently depending on the type of debt you are refinancing.

Auto Loans

Refinancing an auto loan can help lower your interest rate and monthly payments if you initially got a high rate. However, refinancing restarts the loan repayment timeline. You also risk higher total interest costs if you extend the repayment term. Minimum credit scores for auto loan refinancing typically start around 580. Shop around to find the best rate.

Mortgages

Refinancing a mortgage can save tens of thousands of dollars in interest with a lower rate. Closing costs are expensive though, so factor those in. You'll also need a very good credit score to qualify - usually at least 620 but optimal scores start around 740. Take advantage of rate drops to maximize savings.

Personal Loans

Those with good credit can potentially qualify for a lower rate by refinancing a personal loan. This can reduce your monthly payments. Be cautious of repayment term extensions which raise total interest costs. Personal loan refinancing usually requires a score around 670.

Rebuilding Your Credit After Refinancing

A dip in your credit scores due to refinancing debt is temporary. Most impacts fade after 6 months if you take positive steps. 

Here is how to rebuild your credit post-refinance:

• Keep credit card balances very low to avoid high utilization
• Ensure payments on all debts (including the refinanced loan) are on-time
• Check your scores monthly via a free site to monitor rebuilding progress
• Limit new credit applications that cause additional hard inquiries

Sticking to these credit best practices will help scores rebound quickly even after the inquires and changes caused by refinancing debt. Focus on responsible habits.

FAQs

Conclusion

The blog post conclusion paragraph: If you are considering refinancing your mortgage, it is important to understand if this will hurt or help your credit score. Typically, a refinance will not affect the borrower’s FICO rating because of how mortgages work. But there are some things that can cause lenders to change their mind about financing someone for a new loan – these include late payments and bankruptcy filings.

Paying down credit cards directly correlates with score gains according to FICO. Knock out balances and watch scores climb over time. Get tips in our guide on increasing your score after paying off credit cards.

It is always best to consult with an experienced lender before proceeding with any kind of financial transaction in order to ensure good decision-making and protect yourself from damage caused by misinformation!

If you are struggling with overwhelming debt and want to explore your debt relief options, Pacific Debt Relief offers a free consultation to assess your financial situation. Our debt specialists can provide objective guidance relevant information and support to help find the right debt relief solution.

*Disclaimer: Pacific Debt Relief explicitly states that it is not a credit repair organization, and its program does not aim to improve individuals' credit scores. The information provided here is intended solely for educational purposes, aiding consumers in making informed decisions regarding credit and debt matters. The content does not constitute legal or financial advice. Pacific Debt Relief strongly advises individuals to seek the counsel of qualified professionals before undertaking any legal or financial actions.