How does refinancing affect your credit score?

Couple reviewing their finances, discussing how refinancing might impact their credit score.

Refinancing a mortgage can potentially save buyers a significant amount of money over the life of the loan, but it’s important to weigh the benefits and drawbacks. One concern for many homeowners is the potential impact that refinancing can have on their credit score.

Key takeaways

Refinancing your home loan might lower your credit score initially.
Taking steps to protect your credit score can lessen the impact of a refinance.
The benefits of refinancing could outweigh any adverse effect on your score.

Does refinancing negatively impact your credit score? The short answer is yes—but not permanently. Mortgage refinancing means replacing your existing mortgage with a new one, and applying for a mortgage typically results in a temporary dip in your credit score. This is due to the hard credit inquiry process and potential adjustments to your account history.
It’s important to understand the reasons behind this impact and consider the broader financial advantages that refinancing can offer, such as reduced interest rates and lower monthly payments, which can contribute to long-term financial stability and savings.

How refinancing a mortgage impacts your credit score

Your credit score is a three-digit number representing your credit behavior and risk. Lenders use this number to determine how likely you are to repay your debt on time. Refinancing your mortgage can potentially affect your credit score in a few different ways:

Credit inquiry

When you apply for a mortgage refinance, lenders will want to know how much risk you present as a potential borrower. They offer you rates and terms based on their assessment.

To check your credit score, they’ll pull your credit report and perform what’s known as a "hard inquiry," which can temporarily impact your credit score as it registers that you are seeking to take on debt. A hard inquiry can lower your credit score by a few points for up to one year. It can also stay on your credit report for up to two years.

Rate shopping

Submitting multiple credit applications lets you compare lenders and their interest rates. This process, known as rate shopping, can lead to several hard inquiries on your credit report in a short amount of time, which may also lower your credit score by a small amount. However, depending on the credit score model, multiple inquiries within a short period (such as 14 days) may only count as a single inquiry, minimizing the negative effects.

Credit history length

How long you've had your credit accounts in good standing may make up a significant part of your credit score calculation. When you refinance, your new home loan replaces your old one, decreasing the average length of your credit history. This shorter credit history may impact your overall.

Total debt

Replacing your old mortgage with a larger one, such as through a cash out refinance, will increase the amount of debt you owe, which might not impact your credit score, but will impact your debt-to-income ratio (DTI).

What happens to your credit when refinancing a home loan?

A hard inquiry for a refinancing application can temporarily ding your credit score by a few points, possibly making it more difficult to qualify for some types of loans. Multiple hard inquiries in a short time could impact your score even further. Generally, seeking multiple lines of credit at the same time—such as a mortgage refinance as well as an auto loan—may be a red flag for lenders.

Although hard inquiries can stay on your credit report for two years, the impact on your score may only last a short time.

How to protect your credit score when refinancing

Even if refinancing can potentially hurt your credit score, there are a few ways to reduce any negative impact on your credit.

Get prequalified for a home loan

While you are in the research stage and before committing to a lender, ask if you can be prequalified. Prequalification, unlike preapproval, allows lenders to give you an idea of the numbers you could be working with if you moved forward with a refinance. To do this, they’ll perform a soft credit pull, which provides a general idea of your credit history without registering on your score.

Don't apply for more financing

If you can, avoid applying for other types of credit for a few months after refinancing to give your score time to recover. New credit applications might leave additional hard inquiries on your credit report, potentially lowering your score even more.

Keep up monthly payments

Maintaining all your credit obligations may be critical after a score drop. Always pay off outstanding balances by the correct due dates. Missed payments and delinquent notices can cause your score to fall, and this type of score drop may be more difficult to recover from.

Pros and cons of refinancing

Weighing the pros and cons of refinancing your home loan may help you make smarter financial decisions.

Refinancing pros

You might get a better interest rate and loan term when replacing your current home loan with a new one.
Refinancing may reduce the amount of your monthly payments, leaving you with more cash in your pocket.
A cash out refinance could let you borrow more than you owe on your current loan to pay off high-interest debt, cover an unexpected expense, make home improvements to potentially increase your home’s value, or even put a down payment on a new property. See how much money you could get with a cash out refinance.

Refinancing cons

Refinancing your home loan might incur closing costs, such as loan origination and appraisal fees.
If you refinance into a mortgage with a shorter term, (for example, if you change your 30-year loan to a 15-year loan), your monthly payments could increase.
On the flip side, if you refinance and get a mortgage with a longer term, (such as replacing a 15-year loan with a 30-year loan), your overall debt could increase because you’ll pay more interest over the life of your new mortgage.

FAQs about how refinancing affects credit

How long will it take for my credit score to go back up after a refinance?

Your score could bounce back a few months after refinancing your home loan. Not applying for more credit and making timely payments on your new mortgage and other accounts may help repair any negative impact.

When is refinancing not worth it?

Refinancing might not be worth it if you currently have a lower interest rate than prevailing rates. If you plan to sell your home soon, the benefit of a low interest rate or more favorable terms may not be worth the hassle. You may also want to be careful if the terms of the new loan will negatively impact your finances. For example, if the new mortgage features a higher monthly payment, you should assess whether it fits your current budget.

What are the drawbacks of refinancing?

While refinancing offers many benefits, it can also involve additional expenses, such as closing costs. It’s important to assess your financial obligations, rate environment, and other factors to determine if the advantages of refinancing outweigh the negatives.

Closing thoughts: Impact of home loan refinancing on your credit score

Mortgage refinancing can have many benefits for homeowners seeking to lower their monthly payments, save on interest, or access their home’s equity. However, it’s crucial to understand how refinancing may impact your credit score. Hard credit pulls by lenders may cause a temporary dip in your credit score—but being smart when rate shopping, avoiding other debts, and making timely payments on your new mortgage may help you rebuild your score and achieve your long-term financial goals.

Thinking about refinancing your home loan? Discover® Home Loans has resources for navigating this process, such as a mortgage refinance calculator and cash out refinance calculator.

The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover Bank or its affiliates.