Does a Mortgage Refinance Impact my Credit Score?

In 2011 you need to have a good credit AND equity in your home in order to refinance.  If you aren’t among the 23% of Americans upside down on your mortgage, you are very fortunate.  Mortgage interest rates are the lowest they have ever been and now is a great time to refinance, if you can.

When you apply for a mortgage refinance you still have to quality for the mortgage, just as you did the first time. You need to make sure you have good credit before applying and there are no errors on your credit report.  It is best to pay down your credit card balances and don’t open any new accounts prior to applying.

Order your credit reports from all three credit reporting agencies for free at annualcreditreport.com.  You may want to get your scores also, which are available for a fee.  Or you can get a free score at either CreditSesame.com or Credit.com.  When a mortgage lender pulls a credit report, they pull it from all three credit-reporting agencies.  It’s called a “tri-merged” report, which also includes your credit scores.  Since the scores can vary from each credit reporting agency, the lender uses the middle score, but they use the credit information from all three.

As a result, you will have inquiries from the lender on your credit report at all three credit reporting agencies, your former mortgage will be reported as paid and closed, and a new mortgage account will be reported. Here is how each will impact your score:

Inquiries

Inquires indicate that someone has looked at your credit report.  When you shop for a mortgage you could and should shop around for the best rate.  The mortgage lender will verify your credit to determine which rate you can qualify for.  If you have contacted to several lenders, each will pull a tri-merged credit report.

Shopping for credit can hurt your score, albeit only slightly, if you do so over several months. If you shop for a loan all within a 45-day window, these inquiries will be counted as one and will have little impact on your score.

Closed mortgage

Your former mortgage is now a historical record on your credit report because it is closed and paid.  If you had this mortgage for years, you have traded an old mortgage for a new account, with no credit history.  It was an older account which was included in calculating average age of credit and how much you owed on the mortgage. This could impact your score because you don’t have the current history and account age.

New Mortgage

The new mortgage is a new account and will reflect a different monthly payment and loan amount.  Your monthly payment may be lower,  but you have increased the amount you owe to the loan amount; you are at the maximum. You have a new account that doesn’t have any payment history, which can also hurt your score.

Most of these will not cause your score to drop that much and will improve with time.  If the refinance reduces your payments, don’t let the change to your score impact your decision. Just make sure you pay your mortgage and all your bills on time.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

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