Re: Does no longer having a mortgage affect credit
10-25-2010 08:12 AM
There are a couple things going on here:
1) Applying for new credit (refinancing the mortgage).
2) New account (new, refinanced mortgage).
3) Closing old account.
Everything below is based upon the assumption that the new mortgage loan is only going to be in your spouse's name.
1) Inquires have a slightly negative impact on credit scores. Mortgage inquires made in a small window are considered to be one instance of seeking new credit, or one inquiry for credit scoring purposes. I'm not sure of the exact length of the time frame, but I believe the shortest time frame is 14 days (and that it can be longer depending on which Fico model is used). Only the party applying for credit (your spouse) will see this very small impact to their credit. Inquiries stay on your report for two years, but are only used for scoring purposes for one year.
2) Opening a new account has a negative effect on credit scores for a couple reasons. One: It lowers the Average Age of Accounts, since the account with an age of zero is averaged with other accounts. Two: The Fico scoring model treats brand new accounts as a negative factor. Three: Since the amount borrowed is 100% of the amount owed, there is also some score loss due to having a 100% utilization for the installment loan (this is a relatively minor scoring negative). Since the loan is in only in your spouse's name, this only affects your spouse.
3) Closing the existing mortgage loan can, but will not necessarily, negatively affect Fico scores. The determining factor is something called credit mix. If you have no other open installment loans, then you might see a score decrease for not having an open installment loan as part of your credit mix. Keep in mind, that the closed loan will continue to report on your credit reports and factor into your Average Age of Accounts for 10 years, and that negative information will stay on your report for 7 years after the delinquency.
How this affects you vs. spouse?
You: No effect if you have other installment loans. If no other installment loans, small score decrease due to change in credit mix.
Spouse: Moderate score decrease due to effects of inquiries, and new accounts. According to what I've read here on the forums, your spouse should expect to get a good portion of reduced credit score back after about six months of the new loan reporting.
I used to think this same thing but someone much higher up the food chain than I am told me this:
While both closed and open accounts are included in the mix, this doesn't mean that a closed auto loan or mortgage will always be as beneficial tp your score as an open one. So, for example, you're typically going to be better off having some closed auto loan or mortgage than none. But having at least one open is better.
I know I've answered such questions before by simply saying that closed loans are included in the mix, and leaving it at that. I apologize if this implied that there's never a difference between open and closed when it comes to the mix -- because there is. But the short answer still is that, yes, closed accounts are included in the mix.
From a BK years ago to:
EX - 9/09 pulled by lender 802
EQ - 7/06-663, 3/10-800, 10/10-813
TU - 10/10-774
You can do the same thing with hard work