Does Mortgage Refinancing Affect Your FICO Score?

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Does Mortgage Refinancing Affect Your FICO Score?

Credit bureaus, the financial institutions that create the well-known credit ratings, claim that mortgage refinancing may have a variety of effects on your FICO credit score. However, compared to any changes brought on by how you manage your mortgage payments during the term of the note, any influence would probably be minor and short-lived.

Key Takeaways

  • Refinancing regularly or seeking for credit connected to your mortgage too frequently might also lower your credit score.
  • Try to limit your enquiries to a two-week timeframe while you are rate shopping.
  • Keep in mind that older debt with a consistent payment history is preferable than fresher debt for you.
  • If you can, steer clear of cash-out refinances to retain your credit score.

Too Much Mortgage Refinancing Is Not Good

If you often refinance or request for new credit connected to your mortgage, refinancing might become troublesome for your credit score. There are certain exceptions, but generally speaking, credit rating agencies don’t like it when your credit report is retrieved too often over a short period of time and by too many different prospective creditors.

In fact, if you breach a credit agreement or make too many queries on your credit report, FICO may punish you. Additionally, your credit score is requested each time you refinance, and having too many credit score queries in a little period of time might harm your credit score.

Similar to this, looking for a lower interest rate on your present mortgage will prompt many credit queries quickly. Fortunately, numerous queries for some types of debt, including mortgages or student loans, are now regarded differently by FICO and other credit scoring systems than they were in 2009.

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FICO advises completing all of your applications within a 30- to 45-day window if you want to comparison shop. Even if you decide not to take a new loan, FICO’s most recent scoring algorithm considers all of your queries during that time as just one “credit pull,” limiting the influence on your score. Some customers still choose to restrict their queries to a 14-day window, despite FICO’s acknowledgement that some lenders continue to utilize outdated FICO scoring models.

Older Debt Is Better

When you refinance an existing loan, old mortgage accounts are officially paid off, so you can lose out on certain credit advantages by substituting a long-standing payment history on one debt. Obligations that are more established, steady, and older are valued more than debts that are more recent or erratic. Even if you are making payments for the same item, newer loans without a consistent payment history are bad for your credit score.

Your creditworthiness in five categories—payment history (35%), current amount of debt (30%), credit kinds utilized (10%), length of credit history (15%), and new credit accounts (10%)—determines your FICO score.

Cash-out Refinances Don’t Help

Your credit score may be negatively impacted by cash-out refinances in two ways. One is the transfer of debt from one loan to another. The assumption of a greater loan debt may also result in an increase in your credit usage ratio. Your FICO credit score is 30% based on how much credit you are using. Generally speaking, a mortgage refinancing will likely have less of an effect on you the bigger your credit file is and the less of an influence it has on your total debt levels.

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Multiple requests for a refinancing are an issue, and Jennifer Beeston, vice president of mortgage lending at Guaranteed Rate Mortgage, offers a solution.

The best course of action, according to Beeston, is to be aware of your credit score and to compare lenders using that number. No lender is required to check your credit. After choosing the lender you want to deal with, ask them to check your credit and finish the refinancing. It shouldn’t have a negative impact on your credit score to have one lender check your credit and refinancing your house.

The Bottom Line

It is advisable to exercise care while refinancing your mortgage since it may negatively impact your FICO score. It will be beneficial to adhere to our recommendations to refrain from frequent credit applications and refinancing. Inquiries should only be made within a 30- to 45-day or 14-day window when comparing mortgage rates, and you should work with lenders strategically to prevent having too many of them check your credit.

Additionally, keep in mind that, should you decide to undertake one, a cash-out refinancing might be detrimental to your score as could losing your track record of timely payments on previous mortgages. These actions should help you maintain a good FICO score, which is obviously crucial for mortgage refinancing.

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