Can You Sell Your House After Refinancing?
Homeownership isn’t cheap, and you might notice your mortgage eating up a considerable amount of your budget. High interest rates and private mortgage insurance can inflate your mortgage. Plus, you might have home repairs to make but insufficient income to save up for the costs.
Fortunately, refinancing can alleviate these issues if you can get a lower rate. However, if you’re looking to solve immediate financial challenges with a refinance and are planning to sell your house soon, refinancing can introduce negative financial implications.
Refinancing isn’t always the best option if you want to sell your home afterward. While you can sell your house after refinancing, your circumstances may make this a financial loss. This guide will give the details on refinancing and help you understand if combining a refinance with a home sale is financially advantageous.
Can You Sell Your Home After Refinancing?
Unless your new mortgage includes an owner-occupancy clause, you can still try and sell your home after a mortgage refinance. An owner-occupancy clause would require you to live in your home for a specific period of time and treat it as a primary residence.
For example, your refinance might involve the condition that you stay in your home for a year before selling the home. As a result, reviewing the details of your refinance before signing is vital.
In addition, the fees associated with a mortgage refinance closing can make selling afterward prohibitive. In other words, refinancing is rarely worth the closing costs unless you stick around to take advantage of your new monthly payment and interest rate.
You can think of refinancing as an investment that will return future gains. The closing costs are how you pay for the investment. For example, you’ll likely pay the following expenses for refinancing:
- Application fee: Your lender might impose a fee for submitting your application. In most cases, the lender won’t refund the application fee if you don’t qualify for a refinance.
- Appraisal fee: Refinancing usually requires an up-to-date appraisal so your lender doesn’t loan you more than the value of the home.
- Inspection fee: Depending on where you live, you might need another inspection along with the appraisal to verify your home is in good condition.
- Attorney fee: Your state may require a real estate attorney to oversee the closing.
- Title search and insurance: Your lender might require you to pay a title insurance company to confirm there are no liens against your house and provide title insurance.
Because of these fees, closing will typically cost you 2% – 6% of the loan value. This range results in closing costing thousands or tens of thousands of dollars.
Is There A Penalty For Selling A Home After Refinancing?
Some lenders charge a prepayment penalty for paying off a refinance mortgage early. For example, your lender may include a clause in your refinance requiring you to pay your new mortgage for a specific amount of time. If you sell your home before this period ends, you’ll owe your lender the interest that would have accrued over the life of the loan. Therefore, checking with your lender about a prepayment penalty is crucial if you’re planning on selling.
How Long After You Refinance Can You Sell Your House?
Selling before you break even on your refinance creates a permanent financial loss. Because your closing costs will be in the thousands, the financial gains from a lower interest rate, cheaper monthly payment, or shorter loan term will take time to become worthwhile. So, you’ll need at least 5 years in most cases, if not longer, to recoup the money spent on a refinance.
Plus, how long a refinance takes will impact your timeline for selling your house after a refinance. Generally, refinancing takes 30 – 45 days. Remember that specific factors, such as the availability of local home inspectors, could extend this timeline. As a result, how soon you can sell your home after refinancing depends on how quickly you can close and recover your closing costs.
Should You Refinance If You’re Planning To Sell Your Home?
Refinancing your home with the intention to sell afterward may be beneficial if you have a solid plan. If you map out your timeline far enough in advance, you can give yourself time to financially benefit from your refinance and sell your home at the opportune time.
However, it needs to make sense to refinance in the first place. The following are examples of when to refinance.
Reasons To Refinance
- Change your mortgage term: Refinancing can lengthen or shorten your loan term, and either can benefit or be a disadvantage to a homeowner, depending on the circumstances. For example, cutting your loan term from 15 to 10 years may raise your monthly payment but save you money by reducing the interest you pay. On the other hand, stretching the loan term over additional years can lower your monthly payment, making it more affordable.
- Get a lower interest rate: Refinancing can secure a lower interest rate, decreasing your monthly payment and the amount you’ll pay throughout the loan.
- Change your loan type or structure: When refinancing, homeowners can change their loan type to a fixed- or adjustable-rate mortgage. Both have their advantages: fixed-rate mortgages instill a permanent interest rate and monthly payment. If you lock in a favorable interest rate, you may never have to worry about modifying the loan again. Conversely, adjustable-rate mortgages provide minimal interest rates for an introductory period lasting several years. After the initial period, the rate shifts based on the lending market, meaning it could skyrocket. In addition, you can change the type of home loan you have. Generally, you can either have a conforming or non-conforming loan. Conforming loans have low down payment requirements, and you can use them to purchase primary residences, second homes, and investment properties. However, they have stricter financial stipulations for borrowers, such as credit score and debt-to-income ratio limits. Non-conforming loans are usually government-sponsored mortgages, such as Federal Housing Administration (FHA) loans or VA loans. These loans have lower credit and financial stipulations but are only allowed for primary residence purchases.
- Take cash from your equity: A cash-out refinance allows you to exchange some of your home equity for cash. With a cash-out refinance, you will receive a sizable amount of cash and increase your mortgage balance accordingly. For example, if you have $150,000 left on the mortgage for your $250,000 home, you could refinance and receive $30,000 cash. This move would increase your mortgage to $180,000. You could use the money from a cash-out refinance for pressing financial needs. For example, you might pay for necessary home repairs or updates with the funds. You could also pay off high-interest debt, such as a credit card balance or auto loan.
- Eliminate mortgage insurance. Most mortgages involve private mortgage insurance (PMI), an additional fee you pay your lender for the risk incurred by the mortgage. Although many private loans automatically cancel PMI when you have 22% equity in your home or are halfway through your loan term, you can also refinance to remove it. Once you have at least 20% equity in your home, you can refinance to a new mortgage free of PMI. Because FHA loans charge mortgage insurance premiums (MIP) for most or all of the loan duration, it’s common for homeowners to refinance FHA loans upon reaching the 20% equity mark.
When You Shouldn’t Refinance Before Selling
Because closing costs can impact a homeowner’s financial situation, refinancing isn’t always wise. If you’re planning to sell your home soon after refinancing, it’s probably better to sell the home without refinancing your loan. Since you would be paying thousands of dollars to restructure your home loan, incurring this cost only makes sense if you continue living in the home and take advantage of your lower monthly payment or shorter loan term. Remember, a refinance is an upfront expense that allows you to reap long-term benefits. Selling your home after refinancing prevents you from experiencing the financial advantages.
Alternatives To Conventional Refinancing
If you’re considering selling soon but also want to refinance your mortgage now, you have options other than a conventional refinance. The alternatives below allow you to leverage your equity and save money in different ways.
A no-closing-cost refinance is something of a misnomer since refinancing a mortgage is never free. A no-closing-cost refinance adds your closing costs to your new loan balance instead of requiring you to pay on closing day. For example, if your closing costs on a $150,000 refinance are $6,000, your loan would be $156,000 total. As a result, if you sell your home after refinancing, selling for a price that allows you to repay your increased loan balance is crucial. Otherwise, you’ll need to come out of pocket for the difference.
A loan modification changes your current mortgage, while a refinance creates a new loan altogether. However, loan modifications achieve some of the same ends as a refinance. For example, you can request a modification from your lender to lower your interest rate, reduce your monthly payment, or obtain a more advantageous type of loan. A modification costs less than a refinance but might harm your credit. In addition, your lender might deny your appeal for a modification.
Home Improvement Loans
Homeowners looking to make home improvements can use a home equity loan or home equity line of credit (HELOC) instead of a refinance. A home equity loan is a loan balance separate from your original mortgage. It’s a second mortgage with its own terms that you’ll start paying on after receiving the loan.
The second option for home improvement financing is a home equity line of credit, which gives homeowners access to up to 85% of their equity for a specified time. Once this period expires, you’ll start repaying the amount you borrowed. Usually, HELOCs have lower interest rates than home equity loans, and you can obtain a HELOC even after you have paid off your home.
The Bottom Line
It’s possible to sell your home after refinancing. However, prohibitive factors, such as prepayment penalties and closing costs, usually mean you’ll lose money if you refinance your mortgage and sell your home within fewer than 5 years.
Fortunately, homeowners can use other financial tools, such as loan modifications, no-closing-cost refinances, and home improvement loans, to leverage their equity. In all scenarios, doing your homework and getting all the details from your lender are essential steps in making a sound financial decision.
If you’re looking to refinance your mortgage, start the refinance process today.