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Does refinancing a mortgage hurt your credit? (2023)

Drops in your score should be temporary

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If you need to reduce the interest rate on your mortgage loan or use your home equity for a necessary expense, a home refinance can be a smart move. While most homeowners pursue a refinance to put themselves in a better financial position, note that your credit score will be temporarily affected in the process.

“Refinancing your home loan can have implications for your credit score, but it doesn't necessarily mean it will be negatively affected,” said Alex Shekhtman, CEO and founder of LBC Mortgage. “When you apply for a refinance, the lender will likely conduct a hard inquiry on your credit, which might cause a slight and temporary dip in your score. However, rest assured that the impact is usually minimal and short-lived.”


Key insights

  • A home refinance will temporarily affect your credit score, but it should bounce back after regular on-time payments.
  • A home refinance is worth the temporary credit score drop if it saves you several hundred dollars each month.
  • Protect your credit score by shopping for a refinance rate within a 14- to 45-day window.

How does refinancing affect your credit?

“Determining whether refinancing is a beneficial move for you depends on your unique circumstances,” said Shekhtman. “If the new loan terms lead to long-term savings, it could outweigh any temporary credit score decrease.”

Remember that most negative changes to your credit are temporary and shouldn’t have a lasting negative effect on your credit as long as you continue making on-time mortgage payments.

Closing out your old loan

Closing your previous mortgage can affect your credit, depending on the age and amount of your old loan. In general, loans with long, consistent on-time payment histories help boost your credit. With a refinance, you end one mortgage and start a new mortgage that doesn’t have a payment history yet, which can cause your credit score to dip.

Some of our reviewers have reported particularly significant credit hits when refinancing — like a reviewer from Arizona, who wrote, “I recently refinanced my mortgage, for a lower rate and payment without taking out any funds, and they dropped my credit score 21 points.”

Late or missed payments

Refinancing can change the amount you pay each month and how long you’ll need to make payments. While these changes are often positive, it’s important you stay on top of the new payment schedule. Payment history accounts for 35% of your FICO score, so just one late payment could have long-term negative effects on your credit.

Typically, a lender won’t report late payments to the credit bureaus until they’re 30 days past due. If your mortgage payment slipped your mind this month, make sure you contact your lender immediately.

Most lenders offer automatic payments, which means they can deduct your mortgage payment from your bank account each month to help you avoid missing a payment.

Hard credit inquiries

Hard credit inquiries, which occur when lenders pull your credit report to evaluate your eligibility for refinancing, can generally drop your score up to five points and stay on your credit report for up to two years.

However, filing all your refi applications within a few weeks can help to lump all the inquiries into one single, minor hit to your score.

Amounts owed

How much debt you owe makes up 30% of your FICO score. According to FICO, the amount of debt you have is not as significant to your credit score as your credit utilization. Your credit utilization rate is calculated by dividing the total outstanding balances on all revolving credit accounts, such as credit cards, by the total credit limit across those accounts.

Installment loans, like a mortgage or car loan, do not affect your credit utilization rate, so a refinance will not have a huge impact on the amounts owed section of your credit score. However, if you use your cash refinance to pay off credit card debt, then your credit utilization rate would decrease, which should increase your credit score.

» MORE: Cash-out refinance vs. home equity loan

How to protect your credit when refinancing

Your credit score should bounce back after a few months of your refinance as long as you continue to make on-time payments and don’t add on a lot of credit card debt.

Here are some other ways to protect your credit while going through the refinance process.

Shop for your rate in 45-day window

It is smart to compare different lenders’ refinance rates to ensure you are getting the best rate. Even though locking in a rate with a lender is considered a hard inquiry, you can still ask multiple lenders for a rate without it damaging your score.

According to FICO, inquiries made within a 14- to 45-day window are counted as just one inquiry, depending on the credit scoring model used. If you decide on a loan within 30 days of rate-shopping, those inquiries may not even affect your current rates at all.

Wait for other financing

Focus on your mortgage refinance for now and, if possible, wait a few months afterward to pursue other financing options, such as a new car loan or opening up a new credit card.

This will give your credit score time to bounce back to its original rate and won’t look like you are trying to take on too much new debt at once.

» MORE: How soon can you refinance a mortgage?

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    FAQ

    Can refinancing multiple times hurt my credit?

    While many of the effects refinancing has on your credit score are temporary, refinancing multiple times can extend and increase their impact. There isn’t an absolute limit to how many times you can refinance, but you should consider the costly closing costs before moving forward with another refinance — it might not make your new rate worth the fees and time.

    What credit score is needed for a refinance?

    Scores will vary by lender, but refinancing to a conventional loan will need a minimum score of 620. If you are refinancing to save money on your loan and get a better rate, you should aim for the highest credit score possible rather than the minimum required.

    How long does it take for my credit score to recover after refinancing?

    Credit score recovery time varies, but most borrowers see their scores rebound within a few months after refinancing. Continuously making on-time payments and managing credit responsibly will further contribute to credit score improvement over time.

    Bottom line

    Is a mortgage refinance worth the temporary dip in credit score? That depends on your financial situation and goals.

    “To make an informed decision, carefully consider factors such as your projected length of stay in the home, closing costs and the potential savings achievable with the new loan,” Shekhtman said. “If the benefits outweigh the potential credit score impact, refinancing can indeed be a wise move to make.”


    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. FICO, “Credit Checks: What are credit inquiries and how do they affect your FICO Score?” Accessed July 31, 2023.
    2. Experian, “How Long Does a Late Mortgage Payment Affect Your Credit?” Accessed July 31, 2023.
    3. Experian, “What Can You Use a Cash-Out Refinance For?” Accessed July 31, 2023.
    4. FICO, “What's in my FICO Scores?” Accessed July 31, 2023.
    5. Experian, “What is a Credit Utilization Rate?” Accessed July 31, 2023.
    6. FICO, “FICO Score Factor: Amounts Owed. Why Debt is More Than Just "What You Owe.” Accessed August 2, 2023.
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