How does refinancing a mortgage affect your credit score?

The pandemic has impacted the finances of many Americans — some good, some bad.

Focusing on the positive here, national mortgage refinance rates have dropped to near-record lows. Since March 2020, the Federal Reserve has cut interest rates twice to help the economy. The result is that mortgage rates have dropped to the lowest seen since the 1970s.

If you're considering a refinance option, research the impact it could have on your personal finances (specifically, if refinancing hurts your credit score). Here's what you need to know.

How does a refinance affect your credit score?

A mortgage refinance can potentially affect your credit score. When you compare rates with lenders, they’ll likely check your credit score to provide you with the most accurate offer. If you obtain multiple rates, you could have your credit checked multiple times. You’ll want to find out if the lender performs a hard or a soft inquiry.

A soft inquiry won’t impact your credit score. It is only visible to you on your credit report. In fact, creditors are pulling soft inquiries on you often when they send credit card or loan offers to you in the mail. A soft inquiry also happens when you check your own credit score or if a potential employer does a background check on you.

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A hard inquiry, however, will affect your credit score. It is visible to creditors and stays on your report for two years. Hard inquiries are reported to the three major credit-reporting agencies: Equifax, Experian and TransUnion. This type of inquiry indicates the number of new credit applications you’ve completed. They lower your credit score and only account for around 10% of your number. If you have too many hard inquiries, you may look like someone who is applying for several loans, and a lender could consider you a high-risk borrower.

The 45-day rule

While you want to limit the number of hard inquiries on your credit report to protect your score, under the latest FICO scoring model, it’s good to know that multiple credit checks from mortgage lenders within a 45-day period are recorded as a single inquiry.

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According to the Consumer Finance Protection Bureau, lenders understand that you’re only going to obtain one mortgage or mortgage refinance, and you likely want to shop around for the best rate. The impact on your credit will be the same no matter how many lenders you check. However, it’s also important to know that the 45-day rule only applies to credit checks from mortgage lenders, and not to other forms of credit, such as credit cards.

If a credit check could move your credit score in to a new range — such as poor, fair, good, and excellent — you might want to pull your credit history before starting the application process. Or ask to be prequalified by a lender. Prequalification involves a soft inquiry and provides you with an idea of what kind of rate you can get. However, being prequalified doesn’t guarantee you’ll get a loan or a specific rate. Instead, it simply provides a guideline for those who want to start their search.

Today's mortgage rates

As of October 8, 2020, Freddie Mac lists the average rates for a 30- and 15-year fixed-rate mortgage as:

• 30 year – 2.87%
• 15 year – 2.37%

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