Will Refinance Your Home Affect Your Credit Score?

Banks Editorial Team · May 20, 2018

Refinancing a home can affect your credit score negatively if it becomes a negative factor used to determine a credit score. The most common factors come from hard inquiries, a new credit application, a missed payment on the current bank loan, and an increase in the credit utilization ratio. Lenders also look at your overall FICO score.

If you want to refinance, taking out that new loan may be worth it despite the impact on your credit report. If you stay consistent when and pay your bill on time, your credit score will improve quickly. Remember to keep your inquiries consistent and minimized so they are considered as one inquiry done within a short time frame. In the end, the decision comes down to need. If you need to refinance your home, then follow protocol and work to improve it, so ultimately this won’t affect your credit score. You may reap the benefits of remodeling and/or improving your home. And ultimately, refinancing your home can save your money, and allow you to keep up with your credit card bills and other debts. And this will help with improving, rather than affect your credit score overall.

How Refinancing Your Home Can Help, but Will It Affect Your Credit Score

Refinancing a home requires taking out a new loan or renegotiating the terms of the current loan. Refinancing may take the form of a Rate and Term, Cash-Out, or Cash-In. In addition, other requirements to refinance include a credit report in good standing. When avoiding a negative impact on your credit score, make sure your inquiries to other vendors are within proximity and not spread out in gaps. Refinancing a home can also impact your credit score positively if you are current with all your bills, current loan payments and have no bad credit history
When you refinance a mortgage or debt, you apply for a new loan that will enable you to pay off the original loan. Many homeowners refinance their homes because it enables them to get a reduced interest rate or reduced monthly payment. When you refinance, there are several options you have. When you chose a Rate & Term, the principal remains the same but changes to the interest and/or term of the loan are made. If you chose Cash-Out, the principal is increased and you are given cash to spend from the difference in loan. For those who chose Cash-In, a deposit to the principal is made enabling negotiations on a better term or interest rate.
In order to avoid risking a negative credit score, you may wan to shop around various lenders to compare the best mortgage rates.

How to Refinance a Home

In order to refinance a home, you’ll be asked for a number of requirements, including but not limited to an appraisal to your home, a credit check, and your proof of income. Closing costs associated with the new loan may also be required. This means that if you refinance your home and you miss payments, have charge-offs, collection accounts, settled accounts, repossession, voluntary surrender, foreclosure, bankruptcy, closing accounts, and/or have opened too many new accounts too soon, your refinance may add to the negative history on your account and therefore affect your credit score. If you refinance your home, make sure to improve you credit score by paying all your bills on time. As you bring down your debt, you’ll also improve your credit utilization ratio.
FICO are credit scores used to determine one’s mortgage. When you refinance your home, the mortgage is re-accessed using the FICO scores obtained from Equifax Beacon® 5.0, Experian®/Fair Isaac Risk Model V2SM, and TransUnion FICO® Risk Score, Classic 04. Sometimes, FICO scores are listed on the tri-merge report. These reports are Equifax/FICO classic V5 FACTA, Experian/Fair Isaac, and Transunion/FICO Classic (04). If a lender reports a re-finance as a modified original loan, then your credit history will not be impacted negatively because the re-financed loan will be considered as the original loan with changes. Therefore, credit inquiry, changes to the balance (credit utilization ratio), or changes to the term of the loan will not be impacted.
It’s best to make sure your payment history is not derogatory because this factor has the largest impact on your credit score. The longer the credit history, the better chances for you to refinance your home. This also means a great credit history for future refinances. A credit utilization ratio of 30% or less is preferred in your history. If you have missed a payment on your current loan, chances are your credit score will drop and you will not be able to refinance your home without an increase in interest.

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