1. It results in multiple 'hard' inquiries
Each time you apply for a new loan, your lender will request your credit history from one of the major credit bureaus, Equifax or TransUnion.
This is called a “hard inquiry,” and each one that's made will lower your credit score several points. They typically stay on your report for 24 months.
Most people like to shop around for rates and compare quotes to get the best deal.
It's fine to check the rates. The trouble comes when you actually apply for multiple mortgages.
How to solve this
Most credit scoring models treat all loan inquiries that come in over a 30- to 45-day period as a single credit pull. So, submit all your applications within that time frame to reduce the hit to your score.
Some lenders still use older scoring models, so consider keeping your inquiries to a two-week limit.
The money you save refinancing should outweigh any ding to your score. Having lower monthly payments should improve your credit score over time if you maintain a strong payment history (worth 35% of your score) and use your savings to help reduce your overall debt (30% of your score).
2. You close an old account (namely, your existing mortgage)
When you refinance your home loan, you’ll be closing one account to open a new one (especially if you're switching lenders).
Because your credit score factors in the age of your oldest account, and the average age across all accounts, closing a long-standing credit account could lower your score. New debts — even if you’re still making payments toward the same house — aren’t as valuable to your credit score.
How to solve this
Your credit score should creep back up as you pay down the new loan — and this should be easier since your monthly payments will be lower. Otherwise, you’ll need to wait for your other credit accounts to age so that the refinancing's impact on your score lessens. Make sure to keep monitoring your score regularly using a free online service.
In the meantime, use the savings from your new mortgage loan to service other debt. You’ll not only reduce the amounts you owe, you’ll also lower the percentage of your credit that you’re using, which is known as your credit utilization. Bringing that down works wonders for your score.
3. You miss payments during your refinance
Some borrowers get in trouble by skipping a payment on their original mortgage when they (incorrectly) assume their refinance loan has gone through, Equifax says.
Since payment history's the most important factor in determining your credit score, missed or late payments can sink it. And, they can stay on your credit report for up to seven years.
How to solve this
Don’t stop making payments on your old mortgage until you’re sure the refinance has closed.
Keep in touch with your lenders and don’t assume the process will be complete by a certain date.
Skip the grunt work
Other ways to lift your credit score
You won’t be able to take advantage of rock-bottom mortgage rates with a lower-than-average credit score. Here are four more ways to bolster your score:
- Let the experts monitor your score. You can check your score and even get help monitoring it — for free. If you sign up with Borrowell, for example, you’ll get a peek at your credit score along with access to free credit monitoring.
- Consolidate your debt. Nothing can drop your credit score quicker than late payments. A debt consolidation loan lets you take out a new low-interest loan and use it to pay off all your high-interest debt. With a free online service like LoansConnect, you can get the best lending options to consolidate your debt.
- Dispute errors on your reports. Get free copies of your credit reports and comb through them line by line for any outdated or incorrect information. That could include loans you’ve already paid off or debt that’s not even yours.
- Add to your credit mix. Lenders like to see a healthy blend of credit, such as mortgages, car loans and credit cards. A secured credit card can help you build your credit history, especially when you can’t get approved for the real thing. These cards are low-limit and require a deposit.
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If you're in the market for a new mortgage, or if you're looking to refinance before interest rates rise again, go to Homewise now and answer a few simple questions to get started.