Individuals with mortgages will often choose to replace their mortgage with a new, more favorable one. This process, called refinancing, can be motivated by many things: an improvement in interest rates, a change in the mortgage holder's financial situation or a desire to change the loan's repayment terms. So long as the size of your new mortgage is similar in size to that of the old mortgage, refinancing should not harm your credit score.
Amount of Debt
One of the chief factors that goes into the calculation of a person's credit score is the amount of debt he currently has. Generally, when mortgages are refinanced, the old loan will be purchased and paid off by a lender, who will issue the borrower a new mortgage of a similar size but with different terms. If the size of loans are similar, the borrower should see no change in his credit score.
Credit Inquiry
While actually refinancing the loan will likely not affect your FICO score, applying for new loans might. This is because each time a lender runs a credit check on a prospective borrower who has requested a quote for a loan, this inquiry--known as a "hard" inquiry--is listed on the person's credit report and causes her score to drop a few points. However, multiple inquiries from similar lenders--a sign that the individual is shopping for a new loan--will likely be counted as a single inquiry.
Paying on Time
While refinancing will not affect your credit score much, if at all, how you repay your mortgage will. The surest means of dropping a credit score quickly is to miss a payment. Sometimes people will choose to refinance into a mortgage with larger-sized payments to pay off the loan quicker. This may make it more difficult to repay the loan on time. However, repaying the loan on time can improve your credit score.
Length of Credit
One additional factor that may affect your credit score is the length of time that you've had your old mortgage. Credit scores are calculated in part based on the length of time that a person has had credit, going back to the person's oldest open account. The longer your credit history, the better your score. If your mortgage represents your oldest credit account and you close it, your score may drop a few points.
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