Yes, you can sell your home after refinancing, but you may end up losing money on the refinance if you sell before you reach the breakeven point or you’re subject to a prepayment penalty. You may have to wait if your mortgage contains an owner-occupancy requirement. However, in most cases, there is no bar to selling soon after a mortgage loan refinance.
Let’s explore what you need to know about selling your home after a refinance.
Should You Sell Your House After Refinancing: Factors To Consider
In many cases, there is no legal impediment to selling your home after a refinance. But most homeowners choose to wait to sell their homes until after the breakeven point. If the homeowner sells before the breakeven point, then the cost of their refinance is greater than their savings from the transaction.
Beyond the breakeven point, prepayment penalties and owner-occupancy requirements might push you to delay the sale of your home. Here’s a closer look at each of the factors to consider before you put the for sale sign out front.
The Breakeven Point
The breakeven point is a major factor to consider when selling your home after a refinance. Essentially, the breakeven point is when the cost of refinancing is balanced out by the savings you reap from the refinance. You’ll likely want to wait until you hit the breakeven point to make sure you recoup the costs of the refinance before selling.
Here’s how to calculate your own breakeven point.
Let’s say that your original 30-year loan had 15 years left and a balance of $200,000 at 5% APR. At this point, your monthly payment is ~$1,074, not including taxes or insurance.
You find a mortgage lender willing to offer you the same loan term with a 4% APR. After you refinance, your new monthly mortgage payment is $955per month. That means you are saving $119 per month. But you had to pay $8,000 in refinancing costs to finalize the loan.
You can now find the breakeven point by dividing the $8,000 refinancing costs by your monthly savings. In this case, it would take around 67 months, or just over 5.5 years, to breakeven on the refinancing costs. After that point, your monthly savings are pure profit.
Generally, the costs of a refinance range from 2% – 6% of the loan balance. So if you’re refinancing $100,000, then you should expect to pay between $2,000 and $6,000 in closing costs.
Your lender will provide you with a summary of these costs well before sitting down at the closing table. With these numbers in hand, you can determine the breakeven point for your unique situation.
Prepayment Penalties
Beyond the breakeven point, you’ll need to consider the details of your loan product before jumping into the market. Specifically, you’ll want to determine whether your mortgage has prepayment penalties attached.
Some lenders charge this fee if you pay off your mortgage early. Although the exact details of prepayment penalties vary, they are often in place for the first 2 – 3 years of your loan term. But many lenders, such as Rocket Mortgage®, don’t charge any kind of prepayment penalty.
As a borrower, you should take a look at your mortgage paperwork to determine if there are any prepayment penalties involved. If wading through the fine print doesn’t help, give your mortgage lender a call. They should be able to tell you whether a prepayment penalty is required.
If there’s a prepayment penalty attached to your mortgage, make sure to factor the cost into your plans. In some cases, the appreciation of your home’s value will balance out the prepayment penalty. But in other cases, you could be on the hook for thousands of dollars out of pocket by selling before the prepayment penalty disappears.
Owner-Occupancy Requirements
When you refinance, some lenders attach an owner-occupancy clause to the loan. Specifically, this means that the lender requires you to live at the property for a certain period of time.
The lender gets to decide if this clause is thrown into your refinance. But it’s common among FHA loan refinancing solutions. If there is an owner-occupancy requirement, you’ll likely be expected to live in the home for at least a year before selling it.
If your mortgage has this clause, then you’ll need to hold off on selling the home until you hold up your end of the bargain.
If you decide to move forward with the sale anyways, you are opening yourself up to legal action from the lender. Since no one wants the headache of a lawsuit, tread lightly around an owner-occupancy clause and hold off on selling until you are past this requirement.
What Happens If You Sell Your House After Refinancing?
Refinancing a mortgage involves replacing one mortgage with another. Typically, homeowners pursue a refinance to lock in a lower interest rate, obtain a more manageable monthly payment or access their home’s equity through a cash-out refinance.
The mechanics behind this financial move involve repaying one mortgage with the proceeds you get from a new mortgage loan. When you sell the home after a refinance, you’ll repay the new mortgage as you would your original mortgage. As the seller, you’ll get access to the sales proceeds after the mortgage, fees, and potential penalties are paid.
Should I Refinance Before Selling My Home?
Depending on your situation, refinancing your home right before selling it may or may not be a good idea. But the right choice comes down to your goals and financial situation.
If you’re trying to sell a home that needs major renovations or expensive repairs, then you might need to plow some money into the property before hitting the market. But you might not have the cash on hand to cover those costs. In that case, a cash-out refinance might be the solution. It gives you access to the funds you need to complete your renovations and get top dollar for your home.
However, refinancing your home loan isn’t free. In fact, it will likely cost thousands of dollars to finalize a refinance. Make sure to run the numbers of the refinance to confirm that it’s the right move for your financial situation.
As a general rule, some refinances are more expensive than others. For example, the cost of Federal Housing Administration (FHA) streamline and Veterans Administration (VA) IRRRL streamline refinances tend to be on the low side. If the costs are low enough, you might be able to justify the costs even if you plan to sell your home in the near future.
Alternatives To Selling After Refinancing
If you aren’t sure that selling after refinancing is the right move for you, there are some alternative options to consider.
One option is to avoid refinancing until you sell the home. If you know that you are planning to sell the home in the near future, then you might skip refinancing to the best possible terms. Although it might be painful to miss out on the absolute best terms on the market, this move leaves you financially unencumbered when it comes to selling on your preferred timeline.
If you aren’t willing to pass up a refinance, that’s okay. There are other alternatives to selling the home. One is to convert the property into an investment property. If you rent out the property, it might be possible to cover the mortgage payments for the foreseeable future. For reluctant property renters, consider looking for a property manager to cover the day-to-day while you hold onto the property for the long term.
Additionally, you could ask your lender for a loan modification. In this case, the lender will adjust the terms of your loan, including the interest rate and loan term, without an official refinance. Usually, this is a more affordable option than refinancing.
Some lenders also offer no-closing-cost refinances. With this option, you would pay a higher interest rate over the life of your loan. But you won’t have to pay for closing costs upfront. If you are planning on selling the home immediately, this could save you money in the short term.
A final option is to consider a home equity loan or home equity line of credit. With either option, you can tap into the value of your home equity. But you won’t impact your original mortgage loan in any way.
The Bottom Line: Read The Fine Print To Calculate The Cost Of Selling Your House After Refinancing
As a homeowner, you are free to sell your property when you want to. But the terms of your refinance contract could make it more or less appealing for your financial situation.
If you are in the market for a cash-out refinance, then apply online now to get the funds you need for repairs and renovations.
Selling your home after a refinance is indeed possible, but it requires careful consideration of various financial factors. As someone well-versed in real estate and mortgage intricacies, I can dive into each concept presented in the article.
Firstly, let's tackle the breakeven point. This is pivotal when deciding whether to sell post-refinancing. It's the moment when the savings from your refinance counterbalance the costs incurred. The calculation involves comparing your original mortgage's remaining duration, interest rate, and balance against the new terms to assess when you'd start profiting from the lower payments. It's a crucial factor to consider before putting your home on the market.
Refinancing costs, typically ranging from 2% to 6% of the loan balance, encompass various fees, including appraisal, closing costs, and origination charges. These expenses affect the breakeven point and need careful evaluation to determine if selling early post-refinance would result in a financial loss.
Prepayment penalties are another aspect. These fees, imposed by some lenders for early mortgage payoff, can significantly impact your financial gain from selling. The article suggests checking your loan documents or contacting your lender to ascertain if such penalties apply to your situation.
Additionally, owner-occupancy requirements might restrict your ability to sell immediately after refinancing, especially with certain loan types like FHA. Violating this clause could lead to legal repercussions, so it's crucial to understand and abide by such stipulations before listing your property for sale.
The mechanics of selling after a refinance involve repaying the new mortgage from the sale proceeds, considering fees, penalties, and remaining balances. Essentially, you'll access the sales proceeds after settling the mortgage, fees, and any applicable penalties.
Whether to refinance before selling hinges on your specific circ*mstances. For instance, if your home requires significant repairs or renovations before selling, a cash-out refinance might provide the funds needed. However, it's imperative to evaluate the costs versus the potential gains carefully.
If selling after refinancing isn't ideal, several alternatives exist. Delaying refinancing until you sell may keep you financially flexible. Alternatively, converting the property into an investment or seeking loan modification could be viable options to explore.
No-closing-cost refinances and home equity options also offer alternatives that may suit your circ*mstances, impacting your original mortgage differently.
In conclusion, while homeowners retain the freedom to sell at their discretion, the terms of the refinance contract significantly impact the financial feasibility of doing so. Careful consideration, understanding of costs, penalties, and terms, and a thorough review of alternatives are essential to making an informed decision about selling a home post-refinancing.
