As interest rates have edged lower and lower in the last few years, mortgage borrowers have found it advantageous to refinance. And refinance. And refinance.
If you have been thus inclined, you should be aware that there could be significant consequences for your credit score if you engage in this sort of serial refinancing.
Multiple factors have led to an extended refinance boom over the last few years. Interest rates on 30-year conforming fixed-rate mortgages have moved down nearly 3 percent, moving from 6.42 percent in October 2007 to 3.53 percent in October 2012, according to HSH.com.
The Federal Reserve's ongoing purchase of mortgage-backed securities has help serve to keep interest rates low as the economy recovers. In its most recent round of quantitative easing, popularly known as QE3, the Federal Reserve said it will aim to keep rates low even after the economy picks up, or as long as the central bank feels that this is necessary.
Keith Gumbinger, vice president of HSH.com, noted in an email that in addition to mortgage rates being at lows not seen in more than 60 years, the government's Home Affordable Refinance Program (HARP) has also encouraged refinancing activity. While the first version of HARP did not have a major impact, "The HARP 2.0 offer -- the ability to refinance Fannie- or Freddie-backed loans with almost no documentation, no appraisal and no matter how far underwater the property is -- has opened the gates for potentially millions more to refinance in 2012 and beyond," said Gumbinger.
Veronica Clemons, of Wells Fargo's Home Mortgage Communications group in Charlotte, N.C., said in an e-mail that the Wells Fargo has been able to refinance more than 1.2 million loans through the HARP program since it was launched in 2009.
This extended low-rate environment has allowed a lot more borrowers to not only take advantage of a lower mortgage rate, but to refinance to a shorter term loan, allowing them to build equity faster and save on interest payments.
Dennis C. Smith, co-owner of Stratis Financial, a Huntington Beach, Calif.-based mortgage broker, says that previous to 2008 and 2009, he had done only about three or four 15-year mortgages. Since then, he has been doing about 20 15-year loans a year.
The above factors not only encourage refinancing, they make serial refinancing an attractive option. "Our servicing portfolio suggests that over the past three to four years, approximately 5 to 10 percent of borrowers who have refinanced have done so two or more times," said Clemons.
Smith recalls a first-time homebuyer he recently worked with who took out a $271,000 loan at 4.75 percent in early 2011. At the end of 2011, the homeowner was able to refinance to a new loan at 4.375 percent, bringing down the monthly payment from $1415 to $1342 a month. This summer, the same borrower refinanced again, this time lowering the rate to 3.875 percent, bringing the payment down to $1255.
Two ways serial refinancing impacts your credit score
So how does this sort of serial refinancing activity impact your credit score?
John Ulzheimer, president of consumer education at SmartCredit.com, says that every time consumers refinance lenders pull up all three of their credit reports. This results in a credit inquiry.
"Mortgage inquiries are among the least problematic inquiries because when people apply for a mortgage loan, they apply multiple times, especially if they are shopping around for a good interest rate," says Ulzheimer.
If you do all the shopping within a period of 45 days, this will be treated as just one inquiry, he says. The inquiry could lower your credit score, affecting the score for a brief 12 months.
The second impact is that whenever you refinance, a new loan shows up on your credit report. "Every time you put a brand new account on your credit report, it lowers the average age," says Ulzheimer. "If you do this over and over again, even once every two or three years, it doesn't sound like a lot but you can harm your score simply because you are giving the credit scoring system the impression that you have a very young credit report. That's more problematic than the inquiry issue."
The new account factor accounts for 15 percent of your credit score. And this factor could impact a younger borrower, without an extensive credit history, more than it might impact an older person.
In total, serial refinancing could negatively impact the two categories that drive as much as 25 percent of the points in your score, explains Ulzheimer.
Ulzheimer advises borrowers to wait at least a year between refinancing, considering that inquiries are only counted for a 12-month period.
However, "If you can save hundreds of dollars a month, and thousands of dollars in interest, then the credit score becomes secondary at some point."
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More help from HSH.com
Can we do a "cash-in" refinance?
How do I remove or add a name to a home loan?In general, the only way to remove a name from your mortgage will be to refinance or pay off the debt. This is also true when trying to add names to the mortgage. Lenders will not add nor remove names from such an obligation without the opportunity to ensure that the other borrowers have the ability to pay.
I'm an inexperienced refinancer. What can I expect?Q: I owe 56,000 on my eleven year old variable rate mortgage at 8%.I have good credit, have been in my home for 11 years and want a 15-year fixed-rate mortgage. While I have a good income, I have no cash for closing costs. Do I need to pay points and fees? Do I need an appraisal? What can I expect when I approach the bank for a refinance?A: If your credit is good and you have equity in your home, you should be able to refinance to a 15-year fixed rate. Lenders will require an appraisal of the property, but you should be able to build the cost of refinancing into the loan amount, or might be able to trade it off in exchange for a slightly higher-than-market interest rate. As the bank about your loan options, and expect that you'll need to fully document your income, debts and assets.
I'm trying to refinance a jumbo loan.
Is there a ten year refinance mortgage out there?Almost any lender that offers a fixed-rate mortgage will offer a 10-year mortgage. Mortgage rates for a 10-year mortgage usually aren't any better than the rates offered for a 15-year mortgage. That said, be sure to shop around to find a competitive rate. Getting a fixed-rate mortgage with a term as short as 10 years will save you a lot of money on interest costs.