It’s no surprise that many folks are rushing to refinance.
Interest rates are at historic, once-in-a-lifetime lows, and many homeowners are looking to lock them in.
While refinancing during COVID-19 has been covered quite a bit, one thing that tends to be overlooked is how refinancing your mortgage could impact your credit history and score.
Checking your credit
Refinancing is when you replace your mortgage loan with a new one. It always involves taking out a new mortgage loan.
Whenever you apply for a loan, it’s almost certain that the lender will have you sign a form giving them permission to “pull your credit.”
This allows the lender to purchase your credit report and credit score from a credit agency. The information in your credit report will be used to determine if you’re eligible for a loan, and it will likely also affect the interest rate and other terms you’re offered.
When a lender pulls your credit, it shows up on your credit report as an “inquiry” which may affect your credit score.
Pro tip: Credit scores are especially sensitive to opening multiple new credit accounts in a short amount of time, so if you’re concerned about maintaining the best credit score or have been working hard to strengthen your credit, don’t apply for credit cards, loans or some services (like a new cell phone plan) unless you really need them.
Paying off a loan
Refinancing means you’ll pay off your current mortgage loan with a new one. Similar to what happens when you take out new lines of credit, you may also see your credit score drop a bit when you pay off a loan, especially if you have very few lines of credit in your name.
Luckily, there are ways to strengthen your credit history and increase your score, including building a track record of making your mortgage payments on-time.
Your credit is an important personal asset. Treat it with care and it will serve you well!
- For more info on this topic, have a look at the factors that impact your credit score.
- Want to better understand how lenders make credit decisions? We explain how lenders see your credit score.