Does refinancing hurt my credit score?
Refinancing a mortgage can seem like a smart financial move, but have you ever wondered how it could harm your credit score? Many homeowners overlook this potential pitfall, only to find themselves with a lower credit rating.
In this article, we'll answer the question “can refinancing hurt your credit”, what you can do to minimize any negative impacts, and how to make the most informed decisions.
By understanding these key credit score factors, you can confidently navigate the refinancing process and safeguard your financial health.
If you need more specific guidance, complete our digital mortgage application and one of our experts will reach out to you to help you understand optimal credit scores to refinance your home.
How Does Refinancing a Mortgage Hurt My Credit Score?
Refinancing a mortgage can be a smart financial move, but it does come with potential downsides, especially concerning your credit score, including, but not limited to:
Credit Checks
When you apply to refinance your mortgage, lenders will perform a hard inquiry on your credit report to check your credit score and history. This type of inquiry can cause a temporary dip in your credit score.
Multiple Loan Applications
A single hard inquiry typically reduces your FICO score by less than five points, but multiple inquiries spread over several months can have a lasting negative effect on your credit score.
However, if you make multiple inquiries within a short period (14 to 45 days), most credit scoring models consider it as a single inquiry, minimizing the impact on your credit score.
Closing an Account
When you refinance your mortgage, you pay off your old loan and open a new one. The length of your credit history makes up 15% of your FICO score, so closing your existing mortgage account can negatively impact your credit score by shortening the average length of your credit history. However, if the closed account was in good standing, the impact might be less severe.
Late or Missed Payments
The refinancing process can sometimes take longer than expected, and this can lead to confusion about payment due dates causing you to miss or delay payments. This can damage your credit score, as payment history accounts for 35% of your FICO score.
To avoid this, it’s crucial to continue making payments on your original mortgage until the refinance is officially completed and to maintain clear communication with your lender.
Bigger Debt Load
If you opt for a cash-out refinance, you’ll replace your old mortgage with a larger one, potentially increasing your overall debt load. This increase in debt can negatively affect your credit score.
However, using the cash from the refinance to pay down other high-interest debt, like credit card balances, can positively impact your score in the long run.
What's a Good Credit Score for Refinancing a Mortgage ?
At Rate, we require a minimum credit score of 620 or above to approve a refinance loan*. With a score of 620 or higher, you're more likely to qualify for better loan terms, such as lower interest rates and reduced monthly payments.
Can I Refinance with a Low Credit Score?
Refinancing with a low credit score is possible, but it can be more challenging. Several options are available to help borrowers with less-than-ideal credit scores refinance their mortgages.
- Apply with a Non-Occupying Co-Signer: A non-occupying co-signer is someone who doesn't live in your home but is willing to take financial responsibility for your loan if you default. The lender considers the credit score, income, and assets of both parties when underwriting the loan. However, the credit score that counts is often the lowest median credit score between the two applicants .
- Fannie Mae's and Freddie Mac's Refinance Programs: These programs are designed to assist low-income borrowers with lower credit scores. To qualify, you must have a history of timely mortgage payments and meet specific debt-to-income ratio requirements. These programs can be applied for with a co-borrower, and the lender will take the average of the applicants' median scores as the qualifying score.
- FHA Refinance: The Federal Housing Administration offers several refinancing options for those with lower credit scores:
- FHA Cash-Out Refinance: Allows you to receive the difference from your refinance in cash, which can be used for home improvements or debt consolidation.
- FHA Simple Refinance: Allows you to lower your monthly mortgage payments or get a better interest rate without taking out additional cash beyond the current loan balance.
- FHA Streamline Refinance: Allows you to refinance an existing FHA loan with reduced credit and income verification requirements, as long as you meet specific criteria.
- VA Refinances: The VA offers the Interest Rate Reduction Refinance Loan (IRRRL) and a cash-out refinance option**. The IRRRL, also known as a "VA Streamline Refinance," allows eligible veterans, active-duty service members, and surviving spouses to refinance an existing VA loan to obtain a lower interest rate, often without the need for a new appraisal or credit check.
- USDA Streamline Assist Refinance Program: For homeowners in rural areas with a USDA loan, the USDA Streamline Assist Refinance Program offers a simplified process with reduced paperwork and no credit check requirements, provided you meet specific criteria.
Can I Shop for Rates When Refinancing My Mortgage?
To maximize your savings, it's crucial to shop around for a rate deal that would suit your specific situation. Here's how you could effectively compare rates:
Shop Around
Don’t settle for the first offer you receive. Mortgage rates can vary significantly from one lender to another. By comparing offers from multiple lenders, you could increase your chances of finding a lower rate. Start by researching lenders online, and then request loan estimates from at least three different lenders to compare rates and terms.
We offer competitive terms at Rate. You can talk to our team of experts to find out more.
Leverage Competing Offers
Once you have multiple offers, you can use them to your advantage. If you receive a better rate from one lender, let the other lenders know. They may be willing to match or even beat the competing offer to win your business. This tactic could help you secure the lowest possible rate.
Compare Loan Estimates
When you receive loan estimates, pay close attention to the details. Compare not only the interest rates but also the closing costs, loan terms, and any other fees. This comprehensive comparison will help you understand the total cost of each loan and ensure you're getting the best deal.
Consider Buying Discount Points
Discount points are upfront fees you can pay to reduce your interest rate. Each point typically costs 1% of the loan amount and can lower your rate by about 0.25%.
If you plan to stay in your home for a long time, buying points can be a smart move to save on interest over the life of the loan.
Pay Closing Costs Upfront
While some lenders offer the option to roll closing costs into your loan, this can increase your overall debt and the interest you pay. If you can afford to pay closing costs upfront, it can result in a lower interest rate and reduce the total cost of your loan.
How Can I Start the Mortgage Refinance Process?
Rate offers top-of-the-line technology and expert customer service to guide you through the refinance process.
Take control of your financial future by completing our digital mortgage application, get pre-approved and understand your home affordability options today!
Mortgage Refinance FAQs
1. What costs are associated with refinancing a mortgage?
Refinancing a mortgage comes with several costs that borrowers should be aware of. These include application fees, appraisal fees, loan origination fees, and closing costs, which typically range from 2% to 5% of the loan amount.
Additionally, borrowers might need to pay for title insurance, credit report fees, and recording fees. It's essential to factor in these costs when calculating the potential savings from refinancing to ensure it's a financially sound decision.
2. How long does the refinancing process take?
The refinancing process can take anywhere from 30 to 45 days, depending on various factors, including the lender's efficiency, the complexity of the borrower's financial situation, and the speed at which required documents are submitted.
Some refinances may take longer if there are delays in the appraisal process or if additional information is needed to verify the borrower's creditworthiness. It's crucial to stay in close communication with your lender to avoid unnecessary delays.
3. Can I refinance if I have an existing home equity loan or HELOC?
Yes, you can refinance your mortgage even if you have an existing home equity loan or a Home Equity Line of Credit (HELOC). However, this can complicate the process.
You'll need to work with your lender to subordinate the second mortgage to the new first mortgage, which means obtaining an agreement that your HELOC or home equity loan will remain secondary to your new mortgage. This step is crucial to ensure that the new mortgage takes priority in case of default.
4. Will refinancing affect my ability to sell my home in the future?
Refinancing your mortgage will not affect your ability to sell your home. However, it's important to consider any prepayment penalties associated with your new loan. Some refinanced mortgages include penalties for paying off the loan early, which could impact your decision to sell the property before a certain period.
Additionally, ensure that the costs and savings from refinancing align with your long-term plans for the home. If you plan to sell soon, the benefits of refinancing may not outweigh the costs.
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Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Guaranteed Rate for current rates and for more information. All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Guaranteed Rate, Inc. does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Guaranteed Rate, Inc. Guaranteed Rate, Inc. its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action. Guaranteed Rate does not provide tax advice. Please contact your tax adviser for any tax related questions.
* Rate does not provide credit counseling or credit repair services.
** Using funds from a Cash-out Refinance to consolidate debt may result in the debt taking longer to pay off as it will be combined with borrower’s mortgage principle amount and will be paid off over the full loan term. VA Cash-out Refinance not available in Texas. Rate, Inc. has no affiliation with the US Department of Veterans Affairs. Contact Rate, Inc. for more information.