A mortgage refinance can often help make your household finances a bit more manageable. But is refinancing a good idea right before you sell your home? Probably not – and we’ll explain why.
Before making your decision, learn about the reasons why some home sellers choose to refinance as well as the types of refinancing options available.
A mortgage refinance is the process of paying off your existing loan and replacing it with a new one. You’ll have several refinance options to choose from. Lets take a look at some of the most popular reasons you might want to refinance.
Refinancing your mortgage can seem like a great way to lower your interest rate and monthly payments, But what if you want to sell your house soon after refinancing? Is there a required waiting period or penalties for selling too quickly? Let’s dig into the details,
Overview of Refinancing
First, a quick refresher on what refinancing means. Refinancing is the process of paying off your existing mortgage and replacing it with a new loan. The goal is usually to get a lower interest rate, change the loan term, or take cash out of your home equity.
When you refinance you’ll have to pay closing costs of 2-5% of the loan amount. This covers fees for the lender title searches, appraisals, and more. So refinancing isn’t free, and you’ll want to make sure you recoup these costs.
How Long Should You Wait Before Selling?
There is no definitive rule on how long you must wait to sell after refinancing. However, here are some factors to consider:
Reach the Breakeven Point
To recoup the refinancing costs, make sure to wait until you reach the “breakeven point” before selling. This is when the amount you’ve saved through lower payments equals the closing costs.
For example, if closing costs were $4,000 and you’re saving $200 per month, it would take 20 months to break even. Wait at least that long before selling to avoid losing money.
Check for Prepayment Penalties
Review your loan documents to see if you have a prepayment penalty. This charge applies if you pay off the loan early, usually within the first 3 years. It’s typically a percentage of the loan balance or a number of months’ interest.
Obviously you’ll want to avoid this fee if possible. Make sure the prepayment period has passed before selling.
Review Owner Occupancy Requirements
FHA and some conventional loans require you to move in as your primary residence for a certain period, usually 1 year. This is to prevent borrowers from taking cash-out refinances on investment properties.
Selling before the occupancy period ends could trigger legal action. Check your loan documents and discuss with your lender before listing your home.
Compare to Closing Costs on New Loan
If you’re buying another home, compare refinancing costs to the closing costs on your new purchase loan. It likely doesn’t make sense to refinance if you’re moving soon and will just pay closing costs again.
Consider Alternatives to Refinancing
You may want to avoid a refi altogether and save for closing costs on the new home instead. Or you could take out a home equity loan for renovations rather than doing a cash-out refinance.
Timing Considerations When Selling After Refinancing
While there are no absolute rules on timing, here are a few guidelines on waiting periods when selling a house after refinancing:
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6 months – Many lenders require you to keep the home off the market for 6 months after refinancing if it was listed for sale beforehand. This reassures them you plan to occupy the home.
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12 months – Typical owner occupancy period required by lenders. Provides evidence you moved in as your primary home.
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1-3 years – Common prepayment penalty periods. Make sure this timeframe has passed before selling to avoid extra fees.
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5-7 years – Minimum timeline experts recommend to make refinancing worthwhile, allowing you to recoup costs and maximize interest savings.
The longer you wait to sell after refinancing, the more benefit you’ll get from the lower rate and payments. But life circumstances might force you to sell earlier.
Selling an Investment Property After Refinancing
If you refinanced an investment property or second home, the guidelines are similar but more flexible.
There likely won’t be an owner occupancy requirement. Prepayment penalties and breakeven points still apply. But if you get a good rental return, you may refinance even if you sell sooner.
The timing decision depends on the financials of your situation. Do the math on costs versus savings to make the best call.
Alternatives to Selling After Refinancing
If you need to move soon after refinancing, you may want to consider these options rather than selling right away:
- Rent out the home instead to cover the mortgage payments
- See if you qualify to remove PMI or recast/modify the loan
- Ask the lender if they’ll waive the prepayment penalty due to special circumstances
- Take out a home equity loan for cash instead of refinancing
Key Takeaways
While you can technically sell your house at any time after refinancing, make sure you:
- Understand any prepayment penalties or occupancy requirements
- Calculate when you’ll break even on closing costs
- Compare costs to a purchase loan on a new home
- Consider rental income potential if keeping the home
Aim to wait at least 5-7 years after refinancing to maximize interest savings. But if you need to sell sooner, review the loan documents closely and crunch the numbers before listing. This ensures you make the best financial decision for your situation.
Get approved to refinance
See expert-recommended refinance options and customize them to fit your budget
Cash out your equity
A cash-out refinance allows you to accept a higher principal balance and take the difference in cash. For example, imagine that you have a mortgage with a principal balance of $100,000. You want to spend $10,000 to add a pool to your home, but you don’t have the cash on hand.
If you take a cash-out refinance, you’d take on a loan with a $110,000 principal balance. In exchange, your lender would give you $10,000 in cash a few days after you close.
Unlike other types of loans, you can use the money from a cash-out refinance for almost any purpose. Many homeowners take cash-out refinances to pay off debt. This is because mortgage loans have lower interest rates than most credit cards and other loan types.
Can You Sell Your House After Refinancing?
FAQ
Can I sell my house right after refinancing?
So, can you sell your home after refinancing? Yes, but you should take the time to determine whether or not it’ll be worth it for you and your future. Refinancing can be costly and the amount you save from the refinance may not balance out. Remember that, in general, it all comes down to the numbers.
How long should you stay in your house after refinancing?
It is possible to sell your house immediately after refinancing – unless your new mortgage contract includes an owner-occupancy clause. It is common for owner-occupancy clauses to require you to stay in your house for six to twelve months before selling or renting it out.
What happens if I back out of a refinance before closing?
If the borrower rescinds, the lender has 20 days to return all payments that the borrower has made, including payments to third parties.
Does refinancing hurt your credit?
How long does it take to refinance a home?
A basic rule is to wait until you break even on the closing costs. For example, let’s say it cost you $5,000 to refinance your loan. Your new loan enables you to save $150 per month. In this case, it would take 33 months to start seeing the savings. At the very least, you could wait those 33 months and then put your home on the market.
Can I Sell my Home after refinancing?
Keep in mind that if you do sell your home after refinancing, you’ll need to pay off the remaining balance of your new mortgage. When you sell a home that has been refinanced, the process is a little different than when you sell a home that hasn’t been refinanced. Here are some things to keep in mind:
When can you put a home on the market if you refinance?
Technically, if you don’t have an owner-occupancy clause, you can put the home on the market as soon as you refinance. But it may not be practical from a financial perspective—depending on your equity and selling price.
Can you refinance a house if it is listed for sale?
While refinancing when your home is listed for sale is technically possible, it doesn’t happen often and isn’t a good idea. Usually, lenders are reluctant to approve a refi if they see that the owner is planning to sell and would ask you to remove the property from the market first. Do I have to pay taxes on a cash-out refinance?
How long should you stay in Your House after refinancing?
It’s very difficult to redeem the costs of refinancing in so short a time. Generally, experts agree that refinancing is financially appropriate when you intend to stay in your home for at least the next five years. Are you wondering how long you should stay in your house after refinancing for it to make sense financially?
How often can I refinance my mortgage?
Many mortgage lenders don’t dictate how often you can refinance your mortgage. But they might impose restrictions on how soon you can sell after refinancing.