You'd like to refinance your home loan, to take advantage of a better interest rate or other terms or to get rid of a "balloon" loan which will require a large payment at the end of the term. You also want to buy a new car or perhaps some furniture and you're worried about how refinancing the loan will affect your credit rating for other purchases. You need to keep your credit score high so you always have a borrowing option for expenses other than the home.
Look at your credit record. About 35 percent of your credit score is payment history, whether you've made your house payments and paid all other bills on time. Another 30 percent of the score is the amount and type of your debt. If your payment record is clean and your total debt in relation to your income is satisfactory, refinancing should have minimal effect. You can check MyFICO.com or the Federal Trade Commission recommends checking a website sponsored by the three major credit reporting agencies: annualcreditreport.com
Is this your first refinancing? Credit rating agencies look at the history of refinancing. If you're a "serial refinancer" with a record of frequent changes, another refinancing could impact your score. Even frequent inquiries about borrowing can have an effect. If you constantly or frequently seek new credit, refinancing an equity loan or a balloon loan could affect your score.
How your refinanced loan is reported also could affect the score. If it is reported as a modification, the same basic loan with some changes, three items could change your score: the basic inquiry, an increase in loan balance or revisions of other terms, like length. Unless there are major alterations, the effect on credit score should be minimal. If the refinance is reported as a new loan, the impact could be greater, depending on the new terms and conditions. MyFICO says "new:" loan indicates a new credit obligation and can impact the score more than simply changing conditions of an existing loan.
The terms and conditions of your refinanced mortgage will have more impact than the simple act of refinancing. If you borrow more money, so that refinancing increases your total debt, credit raters will look closely at the ratio of debt to income and also the mix of your credit. If the refinanced loan is your only major debt, your score may be little altered. If refinancing raises the amount of your home loan and thus increases your total debt, your credit ratio could be changed enough to alter your overall score. If you already have a lot of credit card, car or bank loan debt, adding more on a home loan could worsen your score.
- My FICO: How Does Refinancing Affect My FICO Score?
- FHA: Credit Guidelines
- Realtor: Be Careful When Pre-qualifying Online
- VA Mortgage Center, Inc.: Credit Reports and Scores
- Banks.com: How Mortgage Refinancing Affects Your Credit
- Refinance Tool Box: Credit Score Basics
- Mortgage 101: Should You Refinance?
Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.