Can refinancing a mortgage hurt my credit score?

Want to refinance your mortgage but are worried that it may hurt your credit? Refinancing can impact your credit score in a number of ways but usually, the money you save outweighs the affects on your credit. (iStock)

If you own a home, you've probably heard of the term "mortgage refinance" before. Refinancing your mortgage is when you take your existing home loan and pay it off with a new loan by a different lender. The new mortgage lender should offer a lower interest rate allowing you to save money and possibly lower your monthly payment.

You may also want to refinance your mortgage to switch from a 30-year term to a 15-year term or from an adjustable-rate mortgage to a fixed-rate conventional loan. If you are considering refinancing your home, one of the first steps is to get your credit pulled to see which rate you qualify for.

Mortgage refinancing can affect your credit score in a number of ways while, at the same time, maintaining a good score will help you score a lower interest rate on your new loan. If you're interested in moving forward in the refinancing process, you can visit a marketplace like Credible to get a snapshot of mortgage refinance rates you would be prequalifed for without impacting your credit score.

How does refinancing your mortgage affect your credit score?

When you apply for a mortgage refinance, your credit gets pulled which results in a hard inquiry. Hard inquires can stay on your credit report for up to two years and, according to Experian, three hard inquiries may be too many. Ultimately, it all depends on when you apply for new credit. If you have already applied for credit or a loan in recent months and then apply to refinance your mortgage, you may see your credit score drop, but not by too much.

MyFICO says hard credit inquiries only make up 10% of your credit score. However, their research also shows that opening several new accounts in a short period of time could pose a greater credit risk.

One way to avoid too many hard inquiries when trying to refinance your mortgage is to use Credible to do rates shopping. Credible will help you get prequalified in just minutes and review your top lender recommendations without requiring a hard credit check. That way, you can narrow down the new lender of choice so you only have to apply and get your credit pulled once.

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Getting rid of older debt

Another important thing to consider when refinancing your mortgage is that the new loan will replace an older loan. Your older home loan and all that payment history will be removed from your credit report - thus potentially lowering your score.

The length of your total credit history makes up around 15% of your score, so you could see a slight decrease in your credit score once your old mortgage balance is removed from your credit report.

If you're concerned about your credit score, you can use a tool like Credible to check your credit and monitor for identity theft.

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How can I boost my credit score again?

Consider improving your credit even before you try to refinance your mortgage. That way, if your score drops, it won't be as noticeable. Focus on paying your bills on time, keeping credit card balances low, and not applying for any new credit before or right after doing a mortgage refinance.

Keep a no-fee credit card open long-term (even if you don"t use it often) to grow the length of your credit history despite any changes to your mortgage.

You can use a credit monitoring service to keep an eye on any changes. Credible's partners can help you find your credit score, history, alert you to potential fraud, and more.

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Is refinancing my mortgage worth it?

Refinancing your mortgage can be worth it if the numbers make sense. Refinancing can save you hundreds of dollars or more per month depending on your current loan's interest rate, the new loan rates you qualify for, and the length of your loan. Yes, your credit score may decrease by a bit, but your score can always go up in the future by implementing healthy money habits.

Also, shop around for refinancing quotes first with Credible to lower the number of hard inquiries you collect during the process.

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What are today's mortgage rates? 

Mortgage rates have been historically low over the past few years and last year the average 30-year fixed mortgage rate fell below 4% according to Freddie Mac. Since the start of the pandemic, lenders have tried to offer relief to existing homeowners and the Federal Reserve even cut interest rates which could affect anyone with an adjustable-rate mortgage or someone looking to refinance.

Current mortgage rates are sitting at:

  • 3.000% for a 30-year fixed-rate mortgage
  • 3.000% for a 20-year fixed-rate mortgage
  • 2.375% for a 15-year fixed-rate mortgage

Overall, refinance rates are still low but have bumped up in a bit over the past few weeks, according to Credible. This could be due to factors like changes in the economy, inflation rates, consumer spending, and the overall housing market. You can use a mortgage calculator to help you determine would your new monthly payments would be with today's refinance rates.

Personal factors can also impact your mortgage and refinancing .rates as well as your income, debt amount, and credit score. Of course, the lowest refinancing rates are often reserved for borrowers with excellent credit. So be sure to check out your prequalified refinance rates with a tool like Credible without affecting your credit score.

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