Credit score is a very important metric for virtually all of us, and particularly within the realm of mortgage loans and mortgage refinancing. A common question we receive down these lines from current mortgage owners considering a refinance of their home loan: Can doing so negatively impact their credit score?
At Integrity First Lending, we're happy to assist with numerous forms of mortgage refinancing, including conventional, FHA and even VA loan refinancing for clients throughout Utah. The simple answer to the question above: Yes, refinancing can hurt your credit score in some cases -- but in many situations, this harm will be negligible at worst, and the related benefits you receive from refinancing will be well-worth this drop in credit score (which, by the way, is usually temporary and can easily be recovered from). Here are some basics on the ways your credit score may drop during refinancing, but why these aren't necessarily major areas of concern.
During most refinancing processes, your credit score may drop a few points due to the fact that your credit report will show multiple inquiries from lenders. While this doesn't necessarily mean you're going through with all of these potential loans, it can still ding your score a bit. The good news is that after about two years, these credit inquiries will no longer impact your score.
Another potential issue that can arise during refinancing is that your average age of accounts may drop. For example, if you had a mortgage for 10 years and then refinance, the average age of all your accounts combined would decrease from 10 years to five years. This could lower your credit score a few points as well, but again, this harm is usually just temporary.
One more issue that could drop your credit score during refinancing is if you're taking out a brand new loan as part of the process. If this is the case, it's possible your credit utilization ratio could increase. This occurs when you have more debt than before, which could drop your score a few points.
The best way to avoid any significant drop in credit score when refinancing is to do everything you can to keep your credit utilization low. You can do this by paying off as much of your old mortgage as possible before taking out a new one. Additionally, if you have any other debts, try to pay these off as much as possible before refinancing.
If you have any other questions about how refinancing may impact your credit score or want to learn more about our various mortgage refinance options, please contact Integrity First Lending today. We'll be happy to assist you further!
Equal Housing Lender. Integrity First Lending.
NMLS # 1006977
AZ License # 1004274