Many homeowners have taken advantage of the historically low interest rates that we have seen the past couple of years by refinancing. This has been the most common way homeowners have been able to lower their rates and monthly payments.
This is a great way to save tons over time. According to Freddi Mac, borrowers who refinanced in order to lower their rate or extend the term of their loan saved an average of nearly $2,300 in annual interest during the first quarter of 2020.
This sounds like a perfect scenario that would fit every homeowner right? This is not necessarily the case, as your credit score might take a hit. This isn’t a permanent drop, only a temporary dip in your score. When you are shopping around for a lender, they will want to check your credit. This is considered a hard inquiry that will drop your score by a few points. Your credit score is affected by payment history, using credit, how much you owe on debts, the age of your credit, kinds of credit and recent inquiries.
When you refinance, you are financing 100% of the origination amount so that affects your score in a negative way. Even if you pay off your previous loan, this does not carry over. Also your refinance is a newer account than your previous mortgage which is an older account. Replacing the new with the old also can knock a ding into your score.
There are things you can do to protect your credit while you are in the process of refinancing. When you shop around for a loan, shop with urgency. Submit applications within 14 to 45 days to all the lenders so that it will just count as a single credit inquiry. If you can, avoid making any large purchases during this time. For example if you purchase a car and are refinancing, these both will take a hit at the same time and make your credit score look unappealing.
When taking this process into consideration, weigh the pros and cons. The money saved over the length of a loan can outweigh the credit score slash. Remember the credit score dip is temporary and will bounce back up. Do not worry about the temporary dip because in the long run it will recover if you manage your credit wisely.