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If you’re thinking of selling your home but it needs sprucing up before you put it on the market, or you want to lower your interest rate in the meantime, you can refinance your mortgage before you sell your home.
However, there are a number of things you need to know before going down this path to make sure it’s the best financial decision for you.
How soon can I sell my house after refinancing?
Many lenders have restrictions on how long it will take to sell after you refinance your mortgage. Here are the most common restrictions you might encounter.
Your refinance agreement may contain a clause that prohibits you from selling in the first six to 12 months, especially if you plan to live in the house as your primary residence. Selling before this deadline could expose you to legal action from your lender.
If your refinance agreement does not include this requirement, you can sell at any time after the refinance.
Point: If you’re planning to sell your home after refinancing, check to see if there’s an owner-occupier clause in the contract and ask your lender how much leeway you have to sell before the waiting period ends. Some lenders will allow a sale if you have good reason to sell soon after refinancing.
Your refinance agreement may not contain an owner occupier clause, but the lender may charge a prepayment penalty. These fees are charged by some lenders if you pay off your mortgage early, usually within the first two to three years of getting the loan.
Prepayment penalties are prohibited for certain types of loans, including loans guaranteed by the United States Department of Agriculture (USDA) or the Federal Housing Administration (FHA). In other cases, the amount charged by lenders for prepayment charges is limited, sometimes up to 2% for conventional mortgages.
There are two types of prepayment penalties:
- Hard penalty. A severe sanction prohibits both the sale and the refinancing during the first three years. If you have a firm penalty and you sell within the allotted time, you will pay either part of the unpaid balance or a certain number of months of interest.
- Soft penalty. This only applies to early refinancing. If you have a soft penalty and refinance after you pass the prohibited period, you can sell without penalty.
Be sure to review your mortgage documents to confirm that you won’t pay a penalty before selling your home. Or, at least, find out about its amount in order to be ready if you still decide to repay the loan early.
When it makes sense to sell after a refinance
If you’re in a seller’s market with skyrocketing home prices, refinancing might not be a barrier to selling your home and benefiting from sky-high appraisals.
Although refinancing comes with high closing costs that negate some of your profits, it may be worth it if the benefits of selling your home outweigh the initial refinancing costs.
For example, the Federal Reserve increases borrowing costs, which in turn puts upward pressure on mortgage rates. In such a situation, you may want to refinance to switch from an adjustable rate mortgage to a fixed rate mortgage. This way, you can eliminate the possibility of paying more each month while preparing to sell.
Or if you’ve built up enough equity in your home, a cash refinance lets you extract funds that you can use to make improvements to your home before you list it. This would increase the home’s value and attractiveness to potential buyers once it hits the market.
Before making this decision, consider speaking with a listing agent to make sure this is the right course of action.
Why you might not want to refinance before selling
Refinancing is an expensive process. Closing costs generally range from 2% to 5% of the loan balance. So, selling a home after refinancing means the odds are slim that you’ll get back what you spent on closing.
If you’re planning to move, refinancing could also make it harder to get another mortgage to buy your new home, unless you plan to pay it all in cash.
Plus, paying the refinance closing costs will eat into the money you have available for a down payment on your new loan. Refinancing will also lower your credit score, so you may not be able to secure ideal loan terms.
Ultimately, if your plan is to sell your home and move, it probably makes more sense financially to just save more money and avoid refinancing.
Alternatives to refinancing before selling your home
If you’re planning to sell your home soon, but also want to adjust the terms of your existing mortgage, there are other options to consider besides refinancing.
You can ask your lender to modify your loan. This is when they change the terms of your loan, such as monthly payment, interest rate, and term.
A modification costs less than a refinance – you don’t have to pay closing costs. So if you’re in financial trouble and struggling to keep up with your current payments, going this route gives you some breathing room until you can sell your home.
Refinance with no closing costs
You can go to a lender that offers refinancing with no closing costs. Rather than paying closing costs up front, the lender combines the costs with your loan amount and charges you a higher interest rate.
But just because you pay nothing at closing doesn’t mean it’s a cheaper option. Your monthly payments will be higher if you go this route, but your wallet will be less affected immediately, especially if you plan to sell your home soon.
You need to make sure that the proceeds from the sale of your home will be enough to pay off the principal of your new mortgage. Otherwise, you’ll have to figure out the difference on your own, which could really set you back.
Home equity loan or home equity line of credit (HELOC)
If you need money for home repairs before selling, you can also consider a home equity loan or HELOC. Both are essentially second mortgages that use your home as collateral. But with a HELOC, you only pay interest on the amount you withdraw, whereas with a home loan, you pay interest on the full amount.
You can sell after refinancing, but only proceed if it makes financial sense
It makes sense to sell your home after refinancing if the value of your home has increased significantly from when you originally purchased it. This is especially the case if the price you get will offset the high closing costs of refinancing. If you currently have an adjustable rate mortgage, you can refinance to a fixed rate mortgage to keep your monthly costs stable while you also prepare to sell the property.
If you have accumulated at least 20% equity in your home after deducting the current loan balance, a cash refinance would allow you to extract funds to pay for home improvements before listing it. This would increase your chances of attracting strong offers once it hits the market.
On the other hand, you should probably avoid refinancing your mortgage if you don’t expect to live in the home long enough for it to appreciate (and your equity to grow) to be able to cover closing costs. In such a case, the amount of fees you pay to close the refinance may wipe out any gain from the sale.
Related: Best Mortgage Refinance Lenders
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