Cash-out refinance is a popular option for homeowners who want to access the equity in their homes. It allows them to refinance their mortgage for more than what they owe and receive the difference in cash. While cash-out refinancing can be a great way to access funds for things like home renovations or debt consolidation, many homeowners are concerned about how it will impact their credit score. In this article, we’ll explore whether or not cash-out refinancing affects your credit score.
First, it’s important to understand how credit scores are calculated. Credit scores are determined by a variety of factors, including your payment history, credit utilization, length of credit history, types of credit used, and recent credit inquiries. When you apply for a cash-out refinance, the lender will check your credit score and report the new loan to the credit bureaus. This means that the refinance will show up on your credit report, and it can impact your credit score in several ways.
One of the most significant ways that a cash-out refinance can impact your credit score is by increasing your credit utilization ratio. Your credit utilization ratio is the amount of credit you’re currently using compared to the amount of credit available to you. When you take out a cash-out refinance, you’re essentially adding to your debt load. This can increase your credit utilization ratio and cause your credit score to drop. However, if you use the cash from your refinance to pay off other debts, your credit utilization ratio will decrease, which can help your credit score.
Another way that a cash-out refinance can impact your credit score is by adding a new inquiry to your credit report. When you apply for a refinance, the lender will check your credit score, which creates a hard inquiry on your credit report. Hard inquiries can temporarily lower your credit score by a few points, but the impact is usually minimal and only lasts for a short period of time.
Additionally, making timely payments on your cash-out refinance can actually improve your credit score over time. Payment history is one of the most significant factors that impact your credit score, so consistently making payments on time can help you build a positive credit history and improve your credit score.
In summary, a cash-out refinance can impact your credit score in several ways, including increasing your credit utilization ratio and adding a new inquiry to your credit report. However, if you use the cash from your refinance to pay off other debts and make timely payments on your new loan, it can actually improve your credit score over time. It’s essential to carefully consider your financial situation and consult with a trusted financial advisor before deciding whether a cash-out refinance is right for you.
Consider positioning yourself prior to completing a refinance of any kind by previewing the strength of your middle credit score. Lenders base the mortgage approval around the consumer’s middle credit score and often assess more fees or points at closing when the middle credit score is low or otherwise does not meet their guidelines for approving a consumer.