Mortgage Refinancing Can Lower Credit Score

I recently decided to refinance my mortgage. It was on a 5/1 ARM from over a decade ago. I decided not to refinance once it started to reset each year because, simply, the rate kept getting reduced year after year.

This year, as the economy has recently appeared to stabilize and with my rate going up a bit last year, I thought this would be a good time to re-finance. I found a highly recommended loan officer, received a rate I was happy with, and peace of mind knowing that my monthly mortgage payments would be more predictable. The closing went smoothly and my first thoughts were of relief knowing that I finally got it done.

However, with all the peace of mind came a shock as well. I get a free FICO score each month through one of my credit cards. The score had been just above 800 for many months, up until my mortgage re-finance was closed. It dropped almost 50 points! I had no idea what happened. I immediately thought it was identity theft. So, I ran my free annual credit report at Annual Credit Report. Nothing seemed out of the ordinary there. I ran another a few weeks later just in case there was a delay. But still, everything looked normal.

It wasn’t until recently where my FICO report stated the reasons for my credit score:

Proportion of loan balances to loan amounts is too high

FICO® Scores weigh the balances of mortgage and non-mortgage installment loans (such as auto or student loans) against the original loan amounts shown on a person’s credit report. Your score was impacted because your proportion of installment loan balances to the original loan amounts is too high.

It then all made sense. One major impact on your Credit Score is how much credit you have available. After more than a decade, I put a nice dent in my original mortgage, which frees up a lot of available credit. When I decided to refinance my mortgage, I pretty much reset the amount of available credit I had back to zero, which greatly impacted my score.

It’ll gradually improve of course, as long as I follow the rules of how to raise my credit score. If I had known of this prior to refinancing, I would honestly still go through with it because I like my monthly payments being more predictable and at an acceptable interest rate. But I really would have liked to know what to expect in terms of my credit score impact too. So, hopefully I have helped shed some light on this situation for you today.

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