There are several factors you’ll likely be considering if you’re thinking about refinancing your mortgage in the near future, and the potential impact on your credit will be one of these. There are a few simple ways your score may be impacted by a mortgage refinance, but it’s also important to recognize that these small negative impacts are often cancelled out — and then some — by the savings you receive in other areas.
At Clarity Quote, we’re here to help with all the proper methods and calculations to determine whether the math behind these sorts of moves will make sense for our clients. Our various mortgage calculators, which range from our refinance calculator to loan comparisons, extra payment calculators and more, are the very best in the business. Our team of professionals also offers numerous additional mortgage software services, including those compatible with industry-leading Black Knight/Optimal Blue products.
What is the impact of a refinance on your credit score, and what are some of the basic benefits that will offset any small drops you see in credit? Here’s a primer.
How Refinancing Impacts Credit Score
It’s a simple reality that most mortgage refinancing situations may include elements that lower your credit score in small ways. These include:
- Credit checks: The process of mortgage refinancing requires that one or more credit checks be run on your consumer report. These are in the same league as inquiries related to new accounts and store cards, meaning they each count against your score just a little bit.
- Lower credit limits: When you take out a new loan, your lender will revamp your credit limit by considering your new debt-to-income (DTI) rate in relation to your credit limit. This change is likely temporary, but it could alter the way you view your available credit.
- Closing account: Refinancing also involves closing your current mortgage, which may also lower your credit slightly due to a long-standing account being closed out.
Refinancing Benefits to Offset Credit Drops
Now, as we noted above, these potential hits to your credit are often worthwhile anyway — this is because refinancing comes with several possible major benefits that will offset the negative of a temporary credit drop. Conceivable benefits of refinancing a mortgage include:
- Lower interest rate: You should always search for the best interest rate you’re qualified to receive on your mortgage loan. If you can lower this rate by refinancing, it’s a net gain in your pocket from day one of your new loan or refinance.
- Loan term extension: Some lenders will offer a longer-term mortgage with an attractive interest rate if you refinance. This extension is more than worth it if you’re going from a 30-year loan to a 15- or 20-year one, even with possible minor credit drops along the way.
- Lower monthly payments: The primary benefit of refinancing your mortgage comes in lower monthly payments — this is especially relevant for those who see their interest rate drop.
- Debt consolidation: This is another major benefit that can help you save significantly in the long-term, even if your credit score suffers a bit. If your new mortgage is lower overall and you pay off other high-interest debt like auto loans or credit cards with it, you substantially cut down on interest payments each month and thereafter. This frees up more money for paying down debts in other areas.
For more on how refinancing impacts your credit score, but also on the benefits of this process that offset these issues, or to learn about any of our mortgage calculators or comparison software services, speak to the staff at Clarity Quote today.