Does Refinancing Affect Your Credit Score?

Posted: 6/30/2020 | Read Time: 2min
Last Updated: 10/6/2021

While 38 percent of Americans are likely to purchase a home in 2021*, plenty of current homeowners all over the country are staying put and taking advantage of current low-interest rates with a home loan refinance.

Aside from low-interest rates, the benefits of refinancing a mortgage to a shorter loan term, different loan type, or as a way to cash out on a home’s equity are valid reasons to refinance. Nevertheless, a home loan refinance does come with some big questions, like, “Will a refinance affect my credit score? And if so, is it still worth it?”

Factors That Determine Your Credit Score

Your credit report contains a wealth of information about your finances, including your lending history, credit cards in your name and other contributing factors. This information is used to determine your FICO Score, a grading system that helps lenders determine your risk level if they were to lend you money. The higher your credit score, the more confident the lender.

Credit scores can feel mysterious, especially since three companies calculate them, and each may have a slightly different figure for you. But in general, they all follow a similar breakdown. Here are the categories that affect your score and how heavily they are weighted:

  • Payment History: 35%
  • Amount of Debt Owed: 30%
  • Length of Credit History: 15%
  • Credit Mix: 10%
  • New Credit: 10%

Whenever you open a new credit card or loan — or apply for a mortgage refinance — your credit report will be pulled. This inquiry is recorded on your credit report, where it could stay for a few years. Additionally, any inquiries made within the last 12 months are calculated in your FICO score and typically result in a credit score drop of 5 points or less. This drop is temporary and could go back in a few months.

It’s important to note that the “new credit” category is only 10 percent of your total credit score, and your mortgage lender will be well aware that their pull could be the source of the credit score drop. What lenders are looking for is a pattern: If you opened dozens of credit cards or loans over the past year, all those inquiries would be a red flag. But a slight dip from rate shopping shouldn’t make or break your application.

Other Ways Refinancing Can Affect Your Credit Score

When you refinance, you technically pay off your old mortgage and open a new one. This means that you’ll have a newer loan on your credit history.. This could affect your credit score by altering your credit mix and the length of your credit history calculation. This effect could be slightly negative or neutral, as these aren’t the highest impact categories for your credit score.

On the bright side, a refinance that lowers your payment could ultimately help improve your credit score, as you now have support in making payments on time and in full, month after month.

The Bottom Line

A mortgage refinance might affect your credit score by temporarily lowering it by a few points when you first apply. However, the value of the money you save with a lower interest rate and the potential to boost your score far outweighs the brief dip.

Contact Wyndham Capital Mortgage today to learn more about refinancing your mortgage.

*Wyndham Capital Mortgage commissioned Atomik Research to run an online survey of 2,342 adults in the United States for their Mortgage 101 survey. The margin of error fell within +/- 2 percentage points with a confidence interval of 95 percent. The fieldwork took place between March 23rd and March 29th, 2021. Atomik Research is an independent creative market research agency.


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