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If you’re thinking about selling your house but it needs sprucing up before you put it on the market—or you would like to lower your interest rate in the meantime—then you can refinance your mortgage loan before selling your house.
However, there are a number of things you should be aware of 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 in place regarding how soon you can sell after refinancing your mortgage. Here are the most common restrictions you might encounter.
Your refinancing agreement may contain a clause that prohibits you from selling within the first six to 12 months—specifically, that you plan to live in the home as your primary residence. Selling before this period has elapsed could put you at risk of legal action by your lender.
If your refinancing agreement doesn’t include this requirement, you can sell at any time after refinancing.
Tip: If you intend to sell your house after refinancing, check if there is an owner-occupancy clause in the agreement, and ask your lender what leeway you have to sell before the waiting period is up. Some lenders will allow a sale if you have strong grounds for selling soon after refinancing.
Your refinancing agreement might not have an owner-occupancy clause, but the lender might charge a prepayment penalty. This fee is charged by some lenders if you pay your mortgage off 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 U.S. Department of Agriculture (USDA) or the Federal Housing Administraion (FHA). In other instances, how much lenders charge for the prepayment fee is limited—sometimes to no more than 2% for conventional mortgages.
There are two types of prepayment penalties:
- Hard penalty. A hard penalty prohibits both selling and refinancing within the first three years. If you have a hard penalty and sell within the period, you’ll either pay a portion of the outstanding balance or a certain amount of months’ interest.
- Soft penalty. This only applies to refinancing early. If you have a soft penalty and refinance once you’re past the forbidden period, then you can sell with no penalty.
Be sure to review your mortgage paperwork to confirm you won’t pay a penalty before selling your home. Or, at least, find out how much it will be so you can be prepared if you decide to pay the loan off early anyway.
When It Makes Sense to Sell After Refinancing
If you’re in a sellers’ real estate market with soaring housing prices, refinancing might not be an obstacle to selling your home and benefiting from sky-high valuations.
While refinancing comes with high closing costs that negate some of your profit, it might still be worth it if the benefits by selling your house outweigh the initial refinance costs.
For instance, the Federal Reserve is hiking borrowing costs, which in turn is applying upward pressure on mortgage rates. In such a situation, you might want to refinance to switch from an adjustable-rate mortgage to a fixed-rate mortgage. That way, you can eliminate the possibility of paying more each month while preparing to sell.
Or if you’ve accumulated enough equity in your home, a cash-out refinance allows you to extract funds that you can use to make home improvements before listing it. This would boost the home’s value and attractiveness to potential buyers once it goes on the market.
Before making this decision, consider speaking to a listing agent to ensure this is the right course of action.
Why You Might Not Want to Refinance Before Selling
Refinancing is a costly process. Closing costs typically range from 2% to 5% of the loan balance. So selling a house after refinancing means the odds are low that you’ll get back what you spent to close.
If you plan to move, refinancing could also make getting another mortgage to buy your new home more difficult—unless you plan to pay all cash.
Plus, paying the closing costs on the refinance will eat into the money you have for a down payment on your new loan. Refinancing will also lower your credit score, so you might not be able to secure your ideal loan terms.
In the end, if your plan is to sell your house and move, it probably makes more financial sense to just save up 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 apply to your lender to have your loan modified. This is when they change the terms of your loan, such as the monthly payment, interest rate and term length.
A modification is less expensive than refinancing—you don’t have to pay closing costs. So if you’re experiencing financial difficulties and are struggling to keep up with your current payments, going this route buys you breathing room until you can sell your home.
You can apply to a lender who offers a no-closing-cost refinance. Rather than paying closing costs up-front, the lender combines the fees with your loan amount and charges you a higher interest rate.
But just because you’re not paying anything at closing, doesn’t mean this is a cheaper option. Your monthly payments will be higher if you go this route, but there will be less of an immediate hit to your wallet, especially if you plan to sell your home soon.
You should make sure that the proceeds you get from selling your home will be large enough to pay off your new mortgage principal. Otherwise, you’ll have to come up with 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 could 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 draw, whereas, with a home equity loan you pay interest on the entire 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 risen significantly compared to when you initially purchased it. This is especially the case if the price you get will offset the high closing costs from refinancing. If you currently have an adjustable-rate mortgage, you can refinance to a fixed-rate mortgage to keep your monthly costs stable as you prepare to sell the property, too.
If you’ve built up at least 20% equity in your home after deducting the current loan balance, a cash-out refinance would allow you to extract funds to pay for home improvements before listing it. This would increase your odds of attracting strong bids once it goes on the market.
On the other hand, you should probably avoid refinancing your mortgage if you don’t expect to live in the house long enough for it to appreciate (and your equity to grow) so that you can cover the closing expenses. In such a case, the amount in fees you pay to close the refinance can erase any gains from the sale.
Related: Best Mortgage Refinance Lenders
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