Here's What Happens When Your Credit Score Drops as You're Refinancing Your Mortgage

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  • The interest rate you get in the course of a refinance will hinge on your credit score.
  • If your credit score drops before your loan is finalized, you could end up with a higher borrowing rate or even lose your new mortgage altogether.
  • Paying your creditors on time and avoiding opening new accounts (or closing old ones) during a refinance will help keep your credit score up. 

These days, refinancing a mortgage doesn't make a whole lot of sense. That's because mortgage rates are higher now than they've been in years. And if you can't lower your loan's interest rate in the course of a mortgage refinance, then there's really little sense in going through the process. 

But let's say mortgage rates do drop over time and you decide you're ready to refinance. If so, it's important to go into the process with a solid credit score. But it's also important to maintain that score until your new loan closes. If your score takes a hit before your refinance is finalized, it could result in a higher borrowing rate on your new loan. And you might even lose that new mortgage altogether.

Your credit score really matters

Your credit score tells your lender -- any lender -- how risky a borrower you are. A higher credit score sends the message that you can be trusted to make your payments as you're supposed to. The lower your score, the more a lender might worry about your ability to keep up with your payments. 

That's why it's in your best interest to go into a mortgage refinance with great credit. Doing so not only increases your chances of getting approved for a mortgage, but snagging a favorable borrowing rate, too.

But here's something you may not realize. It's common for lenders to check your credit more than once in the course of writing you a mortgage. They'll check your credit before approving your application for sure. But they might also opt to check your credit before your closing date, just to make sure nothing's changed for the worse. So if your score is lower than it was when you applied to refinance, you could end up putting your loan at risk.

Let's say you started out with a credit score of 750 when you started the process of refinancing your mortgage. That's considered very good, according to Experian. But what if a late payment lands on your record between the time of your refinance application and the week of your closing? That could push your score down to, say, 660. But a credit score of 660 is only considered fair, which is a far cry from very good. 

Now in that situation, your lender may not withdraw your refinance offer completely. But you might get stuck paying a higher interest rate on your new loan due to your score dropping.

Keep your credit score in good shape

Between the time you apply to refinance a mortgage and the time you close on it, it's important to keep your credit score in top shape. That means paying all bills on time, not adding to your credit card debt, and checking your credit report for errors. Also, avoid closing long-standing credit card accounts during that time, as that could actually cause a drop in your score, too.

Similarly, avoid applying for new credit cards while you wait for your refinance to be finalized. Any new credit card application will result in a hard inquiry on your credit report and a minor hit to your score. 

Chances are, a hit of five to 10 points, which is what you're likely looking at for a single hard inquiry, won't impact a pending mortgage refinance. But you're better off waiting and playing it safe.

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