Refinancing has often been used by many to avail lower rate of interest and pay off their housing loans without spending a fortune. However, what leaves most people confused is the impact of refinancing of house loans on their credit score. There’s no point in trying to understand credit score vis-à-vis the refinancing as that involves many complex metrics and calculations. Broadly saying, credit score does get affected but it definitely is impacted by every refinance or loan modification.
Your FICO score is bound to be affected by any loan modifications or refinancing moves you make. However, the quantum of impact depends on how the refinancing gets reported to the credit bureaus. Your refinancing can be reported as the same loan with just a few modifications or it can be reported as a completely new loan.
If the refinancing is reported as the same loan with just a few modifications then changes in loan balance, credit enquiry and any changes in loan terms will have an impact on your credit score. Even if this happens, changes to the FICO score will not be anything substantial.
On the other hand, if the loan is reported as a completely new loan then your credit score still gets affected by then changes in loan balance, credit inquiry and any changes in loan terms. However, another new piece of information affects the FICO score and that’s new “open date”, which indicates that the credit obligation is new. This will have a greater impact on your credit score than what would have been in the case of simple changes in terms of an existing or old loan.
Refinancing your mortgage will certainly have an impact on your FICO credit score but it’s not going to improve it in any way. The impact will be small as well as short-lived. Refinancing might have a greater impact on your credit score if it’s done too frequently or putting in new credits associated to your mortgage. FICO often penalizes if you are not able to honor the terms of the credit or receiving too many inquiries pertaining to your credit report.
Irrespective of what your refinancing terms or needs, your credit score will definitely take a beating, even if it’s for a short term. Thus, you should research a bit before taking the refinancing path and it’s always advisable to weigh your options before you refinance your housing loan.