Does refinancing hurt your credit?

If you’re thinking about a mortgage refinance, it’s probably because you expect it to help your financial situation. You might be looking to get a better mortgage interest rate, reduce your monthly payment, or borrow your equity to consolidate debt.¹

But you might be wary of what doesn’t improve your finances, including a credit check. If you find yourself asking, "Does refinancing hurt your credit?", rest assured, you aren't alone. While your credit score may initially drop, the overall benefits can outweigh this drawback. Discover how refinancing works, why it affects your credit, and which steps you can take to help minimize the impact.

What does refinancing a mortgage involve?

To understand how the overall process can affect your credit, it helps to summarize what refinancing involves. The process typically includes:

• Applying to refinance through one or more lenders
• Getting a new mortgage and using the funds to pay off the old mortgage
• If you're doing a cash-out refinance, you'll receive what's left after paying off your old mortgage
• Making payments on the new loan, which will have different terms

The process will be similar to getting a mortgage to buy a home. But refinancing allows you to get a loan to make home improvements, consolidate debt, or maybe get a loan with more advantageous terms, like a lower payment or interest rate.

Understanding these steps can help you decide whether to refinance your primary residence or a second home.

What makes up a credit score?

Let's look at the factors that make up a credit score. While credit scoring models vary, the factors are usually similar. Here's how FICO® Scores are calculated.

• Payment history (35%): Your track record of paying bills on time
• Amounts owed (30%): How much debt you carry compared to your available credit
• Length of credit history (15%): How long your credit accounts have been established
• Credit mix (10%): The variety of credit accounts you have, such as credit cards, auto loans, and mortgages
• New credit (10%): The number of recently opened accounts and hard credit inquiries

These are the components lenders evaluate when deciding what credit score to use and reviewing your tri-merge credit report.

How does refinancing affect your credit score?

The various events associated with getting a new loan to replace your mortgage can affect your credit score, often temporarily reducing it.

Hard credit inquiries

Credit checks are a normal part of the refinance process. It's important to differentiate between soft and hard credit inquiries.

A soft inquiry happens when you check your own credit, and it doesn't affect your score. However, when you officially apply for a loan, the lender performs a hard inquiry. This falls under the new credit component of your credit score and can have a negative effect.

The impact of one hard inquiry is usually 5 – 10 points. While it stays on your credit report for 2 years, the effect typically lasts for only 1 year. Fortunately, a rate-shopping exemption can limit the impact of multiple hard inquiries on home loan rates.

Paying off and starting new mortgages

When you refinance, your old mortgage is paid off, and a new one is started. This affects your length of credit history and amounts owed.

Closing an older account and opening a new one lowers the average age of your credit history. Additionally, your outstanding balance could increase if your new loan has a higher balance, which is common with a cash-out refinance.

While paying off your mortgage might cause a slight dip, the impact usually fades within a few months of making on-time payments on your new loan.

Potential payment issues

During the transition, some borrowers assume they no longer have to make payments on their original mortgage, or they struggle to keep up with payments. You're still responsible for your current mortgage payments until your new loan closes.

Missed payments significantly harm your credit score, as payment history is the most critical component of the credit score. A late payment can stay on your credit report for up to 7 years. Always keep paying your current loan to avoid the costs of a late mortgage payment.

Does rate shopping when refinancing affect your credit score?

Shopping for the best refinance rates and locking in a great deal is a smart financial move. But does applying with multiple lenders hurt your credit with a new inquiry each time?

FICO® has a built-in shopping exemption. You have a 14-day window (for older FICO® Score models) or a 45-day window (for newer FICO® Score models) to shop for rates. Any mortgage-related credit checks made during this rate shopping window count as a single inquiry, minimizing the impact on your credit.

This exemption doesn't apply to all credit or loan applications. Applying for different types of credit at the same time will result in separate hard inquiries. You can compare refinance rates, ask questions of your mortgage lender, and consider a mortgage rate lock without fear of tanking your score.

Why refinancing may be worth the initial credit impact

The benefits of refinancing may eventually pay off for you and offset the negative credit impact, as long as you do it for the right reasons. Refinancing can be a smart move in scenarios like:

• Consolidating debt: Paying off high-interest credit cards with a debt consolidation refinance makes your payments easier to manage or faster to pay off.
• Funding home remodeling projects: Using a cash-out refinance for essential or value-boosting renovations can increase your home's value.
• Saving money over the long term: Securing a better mortgage rate or switching to a shorter term can help you save on interest.

You can try the Rocket Mortgage refinance calculator to see your potential savings.

How to protect your credit during a refinance

If you decide to proceed with refinancing, you can take several steps to help minimize the credit score impact:

• Know your credit beforehand: Check your score before you apply so you have a baseline to measure any changes.
• Stay within the rate shopping exemption window: Submit your applications within the 14- to 45-day window so they count as a single hard inquiry.
• Request initial quotes that use soft pulls: See if lenders offer a mortgage prequalification or mortgage preapproval that uses a soft inquiry to estimate your terms without affecting your score.
• Don’t make other changes to your credit: Avoid taking out new credit lines or new loans, as this adds more hard inquiries and alters your credit mix.
• Keep up with your monthly payments: Continue paying your current mortgage on time to avoid the consequences of not paying your mortgage.

FAQ

We’ve covered the basics, but let’s answer a few more common questions you may have about the process.

How many times can you refinance your home?

While there’s no rule around the number of times you can refinance, lenders and mortgage investors often impose waiting periods of 6 months to 1 year between loans. Deciding whether to refinance your home ultimately comes down to whether the financial benefits outweigh the closing costs.

How long will it take your credit score to go up after a refinance?

The timeline can vary, but most borrowers see their score bounce back within a few months of making consistent, on-time payments on their new loan. In the meantime, you can help repair your credit by keeping your credit card balances low and paying all your other bills on time.

How long does a mortgage refinance stay on your credit?

The hard credit inquiry from your application will typically affect your credit score for 1 year. The new mortgage loan itself will remain on your credit report for as long as it’s active, and how you keep up with payments moving forward will also matter.

How many times is your credit pulled when refinancing?

You can expect at least one hard credit pull for each lender you officially apply with. A lender may also do a final pull right before closing to ensure your credit situation hasn't changed during the process. Due to the rate-shopping window exceptions, hard pulls from multiple lenders should count as a single inquiry.

Should you buy mortgage points when refinancing?

Mortgage points are a type of prepaid discount on the interest of a home loan. They may be worth purchasing when you refinance if you plan to stay in the home long enough to reach your break-even point, which is when your accumulated monthly savings exceed the upfront cost of the points.

The bottom line: Refinancing credit hits are temporary

Applying to refinance your mortgage will cause a temporary dip in your credit score due to a hard inquiry and the opening of a new loan account. However, this minor drop is usually short-lived, and the long-term benefits can far outweigh the initial impact. Ensure that refinancing is the best move for you, consider its impact on your credit and overall finances, and take steps to minimize the negative credit impact.

If you're ready to refinance and see how a new loan can benefit you, apply online today with Rocket Mortgage.

¹ Refinancing may increase finance charges over the life of the loan.

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