Refinancing your home equity loan -- also called a second mortgage -- can lower your interest rate and monthly payments and provide extra cash. Balloon loans normally have smaller monthly payments than traditional mortgages but require a large lump-sum payment at the end. If you do not have the required payment, you must refinance or go into default and lose your home. Any type of loan refinancing will affect your credit report.
When you apply for a refinance loan, the creditor will request your credit report from one -- or more -- of the three credit bureaus, Experian, Equifax or TransUnion. According to Bankrate.com, these requests can cause your credit score to drop by as many as five points. However, the amount of decrease depends on the number of creditors you have and the length of your credit history. The longer your credit history and the more creditors you have, the less the inquiry will hurt your score. The inquiry remains on your report for two years.
If you borrow more money than you currently owe, your lender will report the increased balance to the credit bureaus. Your increase in debt can cause lenders to hesitate before extending more credit in the future. According to Choice Mortgage Bank, if you do not take on additional debt, the new loan will appear on your credit report but have little impact on your score.
When you pay off your current loan, the credit bureaus mark the account as paid, and it becomes an inactive account. If you have remained current on the obligation, your old loan has been an asset on your credit report. Once it becomes inactive, you might lose a few points -- less than five -- on your credit score because inactive accounts have less of an impact on your credit report than active accounts.
Refinancing can be a sound financial decision if you want to take advantage of a lower interest rate or have a looming balloon payment. Unless you habitually refinance your loans, any affects on your credit report and score are minimal. However, if the refinance is a new loan instead of a modification of your current loan, it will have more of an impact, according to MyFico.com.
Specializing in business and finance, Lee Nichols began writing in 2002. Nichols holds a Bachelor of Arts in Web and Graphic Design and a Bachelor of Science in Business Administration from the University of Mississippi.