Mortgage Refinancing – How It Affects Your Credit
Life happens. Economic cycles are just that… they’re cyclical and the housing market will shift based on shortage and surplus. Sometimes the economy is great and other times it may show down turns or recessions. So what do you do if previous circumstances forced you to have overdue taxes, exceed your limit on the credit card, default on a loan, or even file for bankruptcy? Let me tell you… You don’t complain, nor do you hide! Even after times are tough, you can still get a mortgage although it may be a little more expensive (higher fees and interest rates). To get through tough times or for strategic personal finance decisions, homeowners have started to refinance – some even re-refinance – their mortgages.
How Does Refinancing Affect Your FICO Score?
There are a couple of personal finance areas that refinancing can influence; the extent to which it does is based on whether the option has been reported to the major credit bureaus as a completely new loan or if it shows on your credit report as the same loan with modifications.
For the former, of course the “open date” of a new loan creates an impact. This is because the average age of your credit should be as old as possible as new lines of credit appear to be more risky. But that’s certainly not the only factor.
The balance, inquiry, and terms stated for the loan will also affect your FICO score. Contrarily, an existing loan with some terms changed, has a much less powerful impact. The changes to terms and to the balance of the loan along with a credit inquiry are typically the only factors that will hurt your score.
Now imagine if you had been applying everywhere and anywhere you could; just exactly how many mortgage lenders or banks are going to be pulling your report? The result of this can be detrimental to your credit scores. With this number of inquiries, it’s hard not to see your credit score drop significantly. A quick and heavy dose of hard inquiries on your credit makes you, as a prospective borrower, appear to be needy for quick credit. This is not a hugely desirable trait as things pertain to your credit.
But then everyone is unique and every credit profile is not the same. So depending on what your profile looks like, it’s only an estimate really whether your score’s going to drop by 5 to 10 points or more. Potential risk to your credit is greater if you have limited credit history and less so if you have a longer credit history to your benefit.
Refinancing your mortgage then is to lose that credit history of your prior account which effectively shows as inactive once you qualify for a home refinance loan. Even if you make payments on time and as expected, this may turn into a problem in the short-term if you continue to remove your older lines of credit. The frustrating thing is that this even applies if you make payments on time and as expected.
If you are concerned about your credit scores and the any negative impact it may see, the following section will explore what you need to do.
How to Protect Your Credit Score: Restrict Inquiries To a 30-45 Day Period
Shopping for a refinance loan might result in frequent credit pulls, but these will be counted as one because it’s the same product you are seeking even if it’s from different lenders. It’s recommended that you restrict the inquiries to a 14-day and at most to a 30-45 day period. This will help keep your credit score from being dramatically affected by your search for a good lender.
Therefore, doing your homework and determine what bank may be best as far as your lower-rate home loan should be your priority. Know the reason why you’re refinancing in the first place and connect yourself to the loan options that may be available following independent research and the help of qualified experts.
How to Protect Your Credit Score: Check Your Credit Report For Accuracy
Before you refinance, follow the rules: check your credit report for potential errors and dispute them promptly. Make sure to verify that one error is not present on all three credit reports. First, notify the reporting institution of the inaccuracy and then file a dispute with each consumer reporting agency that shows the error, prompting an investigation that typically takes around a month to complete.
How to Protect Your Credit Score: Pay Off Some Outstanding Debt
This seems all too obvious but make a strong effort to pay off some outstanding debt. Credit utilization is a factor in your credit score and you want to make sure that you are not exceeding more than 30% of your available revolving credit. Be sure to avoid opening any type of new credit card account as this will make the “average age” of your credit younger, thereby degrading your score. Also, whatever you do, don’t fall victim to scams and pay the non-profit business to fix your credit because only you can do that.
Have you been thinking about refinancing your mortgage? If so, get the ball rolling and Get Started with a free quote today.
He is an experienced presenter on affordable housing topics including FHA, VA, and conventional home loan programs.
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