These days, refinancing a mortgage doesn't make a whole lot of sense. That's because mortgage rates are higher now than they've been in years. And if you can't lower your loan's interest rate in the course of a mortgage refinance, then there's really little sense in going through the process.
But let's say mortgage rates do drop over time and you decide you're ready to refinance. If so, it's important to go into the process with a solid credit score. But it's also important to maintain that score until your new loan closes. If your score takes a hit before your refinance is finalized, it could result in a higher borrowing rate on your new loan. And you might even lose that new mortgage altogether.
Your credit score really matters
Your credit score tells your lender -- any lender -- how risky a borrower you are. A higher credit score sends the message that you can be trusted to make your payments as you're supposed to. The lower your score, the more a lender might worry about your ability to keep up with your payments.
That's why it's in your best interest to go into a mortgage refinance with great credit. Doing so not only increases your chances of getting approved for a mortgage, but snagging a favorable borrowing rate, too.
But here's something you may not realize. It's common for lenders to check your credit more than once in the course of writing you a mortgage. They'll check your credit before approving your application for sure. But they might also opt to check your credit before your closing date, just to make sure nothing's changed for the worse. So if your score is lower than it was when you applied to refinance, you could end up putting your loan at risk.
Let's say you started out with a credit score of 750 when you started the process of refinancing your mortgage. That's considered very good, according to Experian. But what if a late payment lands on your record between the time of your refinance application and the week of your closing? That could push your score down to, say, 660. But a credit score of 660 is only considered fair, which is a far cry from very good.
Now in that situation, your lender may not withdraw your refinance offer completely. But you might get stuck paying a higher interest rate on your new loan due to your score dropping.
Keep your credit score in good shape
Between the time you apply to refinance a mortgage and the time you close on it, it's important to keep your credit score in top shape. That means paying all bills on time, not adding to your credit card debt, and checking your credit report for errors. Also, avoid closing long-standing credit card accounts during that time, as that could actually cause a drop in your score, too.
Similarly, avoid applying for new credit cards while you wait for your refinance to be finalized. Any new credit card application will result in a hard inquiry on your credit report and a minor hit to your score.
Chances are, a hit of five to 10 points, which is what you're likely looking at for a single hard inquiry, won't impact a pending mortgage refinance. But you're better off waiting and playing it safe.
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FAQs
If your credit score drops before your loan is finalized, you could end up with a higher borrowing rate or even lose your new mortgage altogether. Paying your creditors on time and avoiding opening new accounts (or closing old ones) during a refinance will help keep your credit score up.
Why did my credit score drop after refinancing my house? ›
Old debt becomes “new” debt:
While payment history makes up 35% of your FICO® score, 15% of your score is based on length of credit history. So, when you refinance, your original loan is closed and a new one is opened. Your good track record ends and you incur “new” debt.
Can refinancing your home hurt you? ›
Credit inquiries
Whenever a mortgage lender conducts a hard credit check to see if you qualify for a refinance, that inquiry is recorded on your credit report. Credit inquiries affect your credit score for one year or less (potentially even only a few months) and remain visible on your credit report for 24 months.
What is the lowest my credit score can be to refinance? ›
A rate-and-term refinance for a conventional mortgage loan typically requires at least a 620 credit score — that is, as long as your loan-to-value ratio is 75% or less, you have at least two months of cash reserves in the bank, and your debt-to-income ratio is under 36%.
At what point does refinancing not make sense? ›
“Remember that refinancing has costs just like a regular mortgage. While your goal might be a shorter loan term or a lower interest rate, if you plan to sell your home in a few years, it might not make financial sense. Make sure the benefits outweigh the costs.”
How many times is your credit pulled when refinancing? ›
There is a myth that a credit report is pulled several times during the mortgage process but the truth is that it is typically only requested once, depending on the timing of a borrower's transaction. A credit report is pulled at the onset of the mortgage application process.
Can you lose your house if you refinance? ›
Financial security: With a cash-out refinance or any other mortgage, you could lose your home if you can't make your monthly payments. By comparison, credit card debt and most personal loans are unsecured.
What is the negative side of refinancing? ›
The main benefits of refinancing your home are saving money on interest and having the opportunity to change loan terms. Drawbacks include the closing costs you'll pay and the potential for limited savings if you take out a larger loan or choose a longer term.
What is not a good reason to refinance? ›
Refinancing to lower your monthly payment is great unless you're spending more money in the long-run. Moving to an adjustable-rate mortgage may not make sense if interest rates are already low by historical standards. It doesn't make sense to refinance if you can't afford the closing costs.
Is it wise to refinance your home right now? ›
You can't get a lower interest rate: If your goal is to reduce your interest costs, right now isn't the best time to refinance. You're likely to end up with a higher rate, plus you'll need to cover closing costs on your new mortgage.
FHA lenders offer refinance loans with scores as low as 500, but they charge higher interest rates to offset the risk that you might not be able to make the payment. However, even if you have a high score, your credit might be considered “bad” because of a recent foreclosure or bankruptcy.
Do I need 20% equity to refinance? ›
Conventional refinance: For conventional refinances (including cash-out refinances), you'll usually need at least 20 percent equity in your home (or an LTV ratio of no more than 80 percent). This also helps you avoid private mortgage insurance payments on your new loan.
How low will mortgage rates go in 2024? ›
Mortgage rate predictions 2024
The MBA's forecast suggests that 30-year mortgage rates will fall into the 6.5% to 6.9% range throughout the rest of 2024, and NAR is predicting a similar trajectory. But Fannie Mae thinks rates could stay in the low 7% range this year.
Why was I denied refinancing? ›
Refinancing can be a rigorous process that requires a home appraisal, documentation of your income and assets, a review of your credit history and your debt-to-income ratio. Falling short of a lender's requirements in just one of these areas could cause your refinance application to be rejected.
Why does my credit score drop after closing a mortgage? ›
Typically, the hard credit pull required to get a mortgage loan will decrease your credit score by about 5 points. Once you actually get the loan, you might have a short-term dip of 15 – 40 points. If you consistently make monthly payments on time, though, you'll likely see your credit score recover and even improve.
Does refinancing affect credit rating? ›
Refinancing is one way to get a better deal on a loan or credit account, such as a mortgage, personal loan, or auto loan. Although it has personal finance benefits, refinancing affects your credit score, usually causing a small, temporary drop.
Will credit score drop after mortgage? ›
Does buying a house hurt your credit? Getting a mortgage for a house can cause your credit score to decline in the short term. But as you pay your mortgage on time, your credit score will bounce back.
Does remortgaging affect your credit score? ›
However, if you are switching to a new deal to borrow more money or reduce your term, then your monthly repayments could increase and therefore your lender may want to reassess your credit and affordability. If you are rejected at this point, there is a possibility your credit score could be affected.
