The views and opinions expressed in this article are those of the author (credit expert John Ulzheimer) and not necessarily those of VantageScore.

If you borrowed money to purchase a home during the last few years and you had good credit, you probably got a pretty competitive mortgage loan interest rate. If you’ve improved your credit scores since then, you may be interested in refinancing your home loan and lowering your monthly payment to an even lower amount. This could potentially save you thousands of dollars over the life of your loan.

When you go through the formal process of refinancing your home loan, you are essentially applying for new debt to take the place of existing debt, but with terms that you feel are more attractive. When you apply for new credit there are many moving parts to the process. To that end, it’s in your best interest to understand exactly what happens when you refinance your mortgage loan.

What Happens When I Refinance?

When you refinance your mortgage loan you will start by formally applying for new credit. When you apply, the lender is going to pull one or more of your credit reports and credit scores, ask you to provide some paperwork about your income, and likely order an abbreviated property appraisal to determine the value of your home. This is all part of the risk assessment and underwriting process.

If your mortgage refinance loan is approved, the new loan funds will be used to pay off your existing mortgage loan. This will take place during the closing of your new loan, which may occur at a lawyer’s office. Shortly after, the pre-existing mortgage balance will be updated to zero on your credit reports, and your old loan will eventually stop being updated by your lender or servicer.

Your new loan will be reported to the credit reporting companies with the loan balance and a new “date opened.” As you begin to make payments your balance will go down month after month. And, if you make all of your payments on time, the loan will always be in good standing. This is all standard operating procedure in the credit reporting industry.

Can My Scores Go Down When I Refinance?

There is very little that happens during the refinance process that can cause a meaningful reduction to your credit scores. There will be, of course, some changes to your credit reports during and after the refinance process, so it’s a good idea to understand just how some of those changes can impact your scores.

First, when you apply for the new loan, the accessing of your credit report will leave a record of a credit inquiry on one or more of your credit reports. If this inquiry is listed as a “hard” inquiry then there is a possibility that the inquiry can lower your credit scores. However even if the inquiry impacts your scores, which it may or may not, the impact is minimal and it cannot last longer than 12 months (because hard inquiries are not seen or considered by credit scoring systems once they become 12 months old).

Further, if your lender only pulled one of your three credit reports then two of your three credit reports won’t have any record of an inquiry. As such, the credit scores based on those two credit reports won’t be impacted at all because there will be no new inquiry.

The only other way the new loan could possibly lower your credit scores can occur when the new account is reported to the three credit reporting companies. Because the new loan will have a new “date opened,” your average age of accounts will go down. That is considered a mathematical certainty. Credit scoring systems take into account the average age of your accounts so a lower average age can result in a lower credit score, although this too is not guaranteed.

Should I Be Worried About Refinancing?

If you can save hundreds of dollars each month by refinancing and you’re planning on staying in your home for the long term, you should definitely consider refinancing your mortgage loan. Think about what you can do with hundreds of extra dollars in your pocket each month. You can pay down other debt, contribute to your retirement nest egg, or establish an emergency fund.

To the extent your credit scores are impacted by refinancing, you shouldn’t be overly concerned. If you already have great credit scores, any changes would be less material. For example, if you had a credit score near 800 when you refinanced, you’d likely still have elite scores after the refinance. Plus, any impact, albeit minimal, would be temporary and your scores would likely recover in short order. But,
the lower monthly payment would persist for the next 15 to 30 years, depending on the length of your new loan.