Should I Refinance if I Plan to Sell?
Historically low-interest rates in 2020 created an outcome where mortgage refinancing activity reached its highest yearly peak since 2003.
While interest rates have been slowly rising, the latest quarterly forecast from Freddie Mac predicts that refinance originations will continue to hold steady for the rest of 2021.
It's tempting to hop on board the refinancing trend while interest rates are still low. However, if you're also thinking of relocating yourself, you might be faced with the question: "Should I refinance if I plan to sell?"
The answer to this question depends on a number of factors, including how long you are planning to stay in your house, your particular financial circumstances, and more.
How Long After Refinancing a Home Can You Sell It?
You can sell your house right after you've refinanced the mortgage except in cases where you have an owner-occupancy clause in the contract. This type of clause can require that before you rent out or sell your home, you have to occupy it for between 6 and 12 months. In some instances, these clauses are open-ended and don't have a listed expiration date.
You might run into issues with the mortgage company during closing if you sell your house before the owner-occupancy clause expires. You'll want to make sure your loan documents don't have these clauses before listing your home for sale.
A prepayment penalty clause won't prevent you from selling your house after refinancing, but it might make it a much more expensive endeavor. This is a clause that states that you could be charged a fee if you sell your house too quickly after you refinance it.
All that being said, refinancing right before you sell often isn't financially or practically beneficial to homeowners.
Should I Refinance If I Plan to Sell?
Refinancing a home can make a lot of sense, particularly with the record low-interest rates available right now. However, refinancing can be a somewhat lengthy process and isn't free, and your particular financial circumstances will determine whether or not it makes sense for you.
First, you will want to consider how long you are planning on staying in your home. If you're going to sell this season, there's a high likelihood that refinancing won't be worth the time, effort, and expense. If you're thinking about selling in five years, it's possible that it could save you money in the long run to refinance to lower interest rates or better mortgage terms.
Some people might find that a cash-out refinance makes sense for them before selling. They might choose to do this in order to have access to money to make improvements to the house and property before putting it on the market. If done well, this might even increase the value of the home and leave you with more money in your pocket once you sell.
Why You Might Not Want to Refinance Before Selling
While everyone's situation is different, it isn't generally a good move to refinance right before you sell.
One of the big reasons why it often doesn't make sense for people about to list their homes is that there are closing costs associated with refinancing. These can range from 2% to 5% of the balance of a loan, just like the closing costs you paid when you got your initial mortgage.
Paying these closing costs can make sense in the long run, but you have to paying the mortgage long enough to recoup the costs. If you're going to be selling right away, there's a lower likelihood that you will pass the breakeven point.
For example, say you pay $6000 in closing costs for a refinance that saves you $300 a month on your mortgage. That's not a bad deal if you're planning on staying in the home for a long time, but the refinance won't pay for itself until you've paid 20 monthly payments. Only after that point are you truly benefiting financially from refinancing.
Another reason to be wary of a home-refinance before selling is that it could make it more difficult to qualify for a mortgage on your new house. This is because you might end up putting some of your money for a down payment on a new home towards your closing costs. Additionally, the refinancing process could lower your credit score due to hard credit checks, which could negatively impact the interest rate of your future mortgage.
The general rule of thumb is that it makes more sense to put your cash towards a down payment and closing costs for the home you are working towards buying rather than towards closing costs on a refinance.
What Are the Reasons to Refinance?
If you aren't sure when you're going to sell your house, it might be useful to learn more about why people refinance in the first place. This can help you understand whether or not it's something that would be beneficial to you.
Shorten Your Mortgage Term
When you shorten the term of your mortgage, it means that you pay more money every month. However, it also means that you'll pay a lot less money overall, saving thousands of dollars in interest payments. It also means that you will own your home outright much sooner.
Lengthen Your Mortgage Term
Lower Your Interest Rate
If the current interest rates are lower now than they were when you bought your home then you might consider refinancing in order to lock in a lower rate. This can save you money in interest over time and lower your monthly payment.
Another thing to consider is whether or not your credit is better than it was when you initially applied for a mortgage. If you've paid off debts and increased your credit score, you might qualify for a lower interest rate this time around.
Change the Type of Loan You Have
It is common for homeowners to refinance to a conventional loan from government-backed loans as soon as they have enough equity in the home.
As an example, FHA loans require that buyers pay a mortgage insurance premium for the entire life of the loan unless you bring 10% or more to the table for the down payment. However, in conventional mortgage loans, you can cancel private mortgage insurance once you have 20% equity in the home.
Change the Structure of Your Loan
Some people choose to sign up for adjustable-rate mortgages when they purchase their homes. These types of loans typically have an initial period where the interest rate is fixed before it starts floating with the market. If you're past the period when the interest rate is fixed, you might consider refinancing to a fixed-rate loan so your interest rate doesn't vary significantly from month to month.
One benefit of a fixed-rate loan is that you always know how much you'll have to pay every month. This can be essential for budgeting if your income is limited.
Take Some Cash Out of the Equity You've Built
There is a type of refinancing option known as a cash-out refinance. This is when you agree to pay a higher principal balance on the loan and receive the difference in cash.
Here's an example. If you want to spend $30,000 on a kitchen remodel and you have a mortgage with a principal balance of $200,000, but you don't have the cash to go forward with your project, you might choose a cash-out refinance. This allows you to take on a loan with a principal balance of $230,000.
One of the reasons homeowners choose this type of loan is that you can use the cash for pretty much any purpose, which isn't true of all types of loans. It isn't uncommon to get a cash-out refinance in order to pay down debt since there is commonly a lower interest rate for mortgage loans than for credit cards and personal loans.
Are You Stressed About the Selling Process? There's an Easier Way!
As you can see, there's a lot to think about if you're considering both refinancing and selling.
If you're wondering "should I refinance before I plan to sell?" you'll want to run the numbers and determine whether or not it's the best move. While it could be a good move in some circumstances, refinancing right before selling doesn't usually make a whole lot of financial sense.
If you're planning on selling your house, it's likely you're dreading the whole process. There are few things in life that are as stressful as buying or selling a home, after all. You're likely losing sleep at night thinking about decluttering, repainting, staging, open houses, showings, and the multi-month-long agony you'll have to withstand until the closing.
Selling your house doesn't have to be that way, though. With iBuyer, you don't have to make any repairs, have any showings, or deal with any of the typical headaches.
Are you wondering how much your home is worth? Check out our home valuation tool here!