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Home Equity Loans Barely Ding Credit Scores

Borrow money to fix up a home prior to sale? Sellers planning to buy again could hurt their credit score – but the impact isn’t huge and it takes a few months to show up.

NEW YORK – Credit scores are important to qualify for a mortgage and snag the best rates. And what consumers do with their finances leading up to the application process can have a big impact on how high – or low – their credit score gets.

With home prices rapidly rising over the past year, homeowners are sitting on a lot of equity, and some are being tempted to take a portion of it out to use for other purposes, like paying for remodeling projects, medical expenses or for other reasons.

Americans often look at potential financing through a home equity loan and wonder how much it will hurt their credit score, especially if they’re saving to buy another home.

LendingTree researchers analyzed more than 500 home equity loans requests in 40 of the largest metros to find out the type of impact that can have on credit scores. On the one hand, they may sell their current home for more money if they use its equity to make improvements. On the other hand, their next home could cost them more per month if their lower credit score forces them to secure a higher interest rate.

Many borrowers do see a credit-score decrease after taking out a home equity loan. But the decline tends to be fairly small – and their credit score usually recovers in less than a year, the LendingTree analysis finds. It also usually takes a few months before their credit score hits bottom and begins to turn around. That recovery takes an average of about 96 days to recover from their pre-loan levels after taking out a home equity loan.

Certain areas of the country may see less of an impact after a home equity loan than others. In LendingTree’s study, it included three Florida markets:

  • Miami: An average initial credit score of 730 goes to 16.23 points after taking out a home equity line of credit. It takes 122.68 days to bottom out, and another 102.8 days to return to its pre-loan level. Total time of a home equity loan impact: 225.65 days
  • Orlando: An average credit score of 710 goes down 25.74 points to 108.3. It takes 87.35 days for the full downgrade to occur, and another 87.35 days to bounce back. Total loan impact: 195.65 days
  • Tampa: An average credit score of 727 drops 21.61 points after taking out a home equity line of credit. It takes 88.89 days to bottom out and another 81.29 days to bounce back. Total loan impact: 170.18 days

Source: “LendingTree Study: New Home Equity Loans Don’t Have a Notable Impact on Credit Scores,” LendingTree (June 29, 2021)

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