When home values are high, you’ll hear people weigh the financial benefits of refinancing their mortgage versus outright selling their home. If you’re wondering which move could be right for you, here’s some help with how to know if you should move and sell your home or refinance.
Key Takeaways:
- Refinancing makes sense if you want to keep your home while changing the structure of your mortgage to meet your long-term goals.
- Selling converts all your equity to cash, which means selling makes sense if you want to buy a new home that better fits where and how you want to live.
- Each option comes with significant costs, so be sure to understand how much you’ll have to pay when deciding between selling and refinancing.
Should I Refinance or Sell My House?
Refinancing your mortgage and selling your home are very different ways to take advantage of your home equity. Refinancing lets you restructure your financial obligations while continuing to own your home, and selling cashes out your equity and lets you move on to your next home.
These are some reasons why you might consider either option.
You need a larger or smaller home
If you plan to start a family, you may need to upgrade your current home to one with more room. Or, if your youngest is moving out, you might need a smaller type of home that’s more manageable and affordable.
Your finances have changed
Owning a home is expensive. Refinancing your mortgage to a lower interest rate or longer term can reduce your monthly payment. Alternatively, you could sell your home and buy a less expensive one.
On the other hand, if you’re making more money, you might want to buy a larger home or move to a more desirable neighborhood.
You want to live closer to your job
The average American spends 28 minutes commuting one way to work. Cutting your commute helps you save time and money. If you find a new job, selling your home and moving closer to work is a clear way to improve your quality of life.
You want to be closer to family or friends
If you’re retiring, you have more freedom to choose where you want to live. You could sell your home and move closer to your loved ones or to a more desirable climate.
You want to save money on your mortgage
The higher the interest rate on your mortgage, the more you pay each month in interest and the more interest you pay overall on your loan. If rates have fallen and you’re qualified, you could refinance and save potentially thousands of dollars.
For example, a 30-year fixed-rate mortgage for $250,000 at a 7% interest rate costs $1,663 per month and $598,680 overall. If you can lower the rate to 5%, that payment drops by more than $300 to $1,342, and the overall cost falls to $483,120 — a savings of $115,560.
It’s a good idea to do the math to make sure you’re actually saving money by refinancing. According to Freddie Mac, the closing costs on a typical refinance run about $5,000, though those costs may be reduced in some instances. You’ll want to figure out the break-even point, which is how long it will take the savings from your reduced monthly payment to pay back the cost of refinancing.
“Calculate the monthly difference between your current mortgage rate and the new mortgage rate — that’s your monthly savings,” says Steffa Mantilla, a certified financial education instructor from Houston. “Now, divide that by the total cost for the refinance. This will tell you how many months you need to stay in your house until you break even on the refinance. Then any month beyond that is pure savings.”
When Refinancing Makes Sense
When is it worth it to refinance? In general, refinancing makes sense if you want to keep your current home and it helps you meet an important financial goal.
You need more time to pay off your mortgage
If you need to reduce your monthly payment, refinancing gives you the opportunity to extend the repayment term of your loan. The trade-off is it likely will cost you more in total interest over the life of your loan.
You want to pay off your mortgage more quickly
You also can refinance to shorten your mortgage term. If you have a 30-year mortgage, you could refinance to a 15-year mortgage. The monthly payment will be higher, but shorter mortgages typically have lower interest rates.
Also, paying off the loan more quickly can save you a lot of money on total interest over the life of the loan. And, of course, you’ll own your home in full — with no monthly mortgage payment to make — sooner.
You can get a lower interest rate
Mortgage interest rates are important because they directly affect your monthly payment and the overall cost of your loan. If you refinance to a lower interest rate, you can save a lot of money over the life of your loan.
You want to change your loan type
Refinancing replaces your existing mortgage with a new one, which lets you weigh the benefits of a fixed-rate vs. adjustable-rate mortgage.
Fixed-rate mortgages offer predictability over the life of the loan. They also protect you from interest rate changes that can raise your monthly bill, and may save you money if you plan to stay in your home for the long term.
ARMs typically have lower initial interest rates that can save you money in the short term. After that, rates adjust from time to time, and you risk increases in your payment.
You want to use your home equity
A cash-out refinance lets you borrow against the equity in your home. If you have a good investment opportunity or need money for a major expense — like college tuition, home improvements, or consolidating high-interest debts — refinancing can let you borrow your equity as cash and repay it as part of your new mortgage.
Pros and Cons of Refinancing Your Mortgage
Before refinancing, consider the pros and cons.
Refinancing Your Mortgage: Pros and Cons
| Pros | Cons |
| Remain in your home. | Interest rates may be higher than your previous rate. |
| Could save money through lower interest rates. | Extending the loan term may increase your overall loan cost. |
| Reduce your monthly payment by lowering your rate or extending your loan term. | Must pay closing costs. |
| Change from an adjustable interest rate to a fixed rate. | Refinancing to a higher rate or shortening the loan term could increase your monthly payment. |
| Cash out your equity. | Reduce the equity you have in your home. |
When Selling Makes Sense
If you want or need to move, selling makes more sense than a refinance. Here are some common reasons to sell your home.
You have enough equity to buy a new home
Selling can be an especially good idea if you have enough equity to sell and then afford to buy a new home outright. Say you have $400,000 in equity. You could sell and buy a home for $300,000 without needing a mortgage — and still have some cash left over.
You need cash without strings attached
Selling your home is one way to get cash without having to pay it back. A cash-out refinance lets you borrow your equity, but selling lets you pocket it all — minus the costs and taxes associated with selling.
You’re ready to move
If you’re looking to move, selling your home is an obvious move. Selling is especially attractive if the proceeds from your home sale can buy your next home outright or put a big dent in your next mortgage.
You also could consider renting out your old home and becoming a landlord. This requires a lot of effort, so you should know what you’re getting into before taking that path.
Pros and Cons of Selling Your Home
Before selling, consider the pros and cons.
Selling Your Home: Pros and Cons
| Pros | Cons |
| Get a large sum of cash based on your equity. | Miss out on the opportunity to rent out your previous home. |
| You’re no longer tied to the home, and you can move where you want. | You won’t benefit from future appreciation in the home’s value. |
| You can find a new home that’s a better fit for your situation. | Closing costs can be high. |
| Lower your housing payment by buying a less expensive home. |
Refinancing Costs vs. Selling Costs
Refinancing a mortgage and selling a home both incur costs, though where those costs come from — and how much you pay — will vary significantly.
Cost of Refinancing vs. Selling a Home
| Refinancing Costs | Selling Costs |
| Application fee: $75 to $500 | Pre-inspection: $300 to $500 |
| Appraisal: $225 to $700 | Cleaning: $200 to $400 |
| Credit reporting fee: $10 to $100 | Staging: $2,000 per month |
| Document preparation fee: $50 to $600 | Repairs: Varies |
| Title search and insurance: $400 to $900 | Landscaping: $150 |
| Origination or underwriting fee: Up to 1.5% of the loan amount. | Listing photos: $200 |
| Agent commission: 5% to 6% | |
| Total: $760 to $2,800, plus 1.5% | Total: $2,850 to $3,250, plus 5% to 6% |
In general, refinancing is cheaper than selling a home. If you aren’t planning a big move or change in your living situation, that may encourage you to refinance rather than sell.
Tips for Deciding To Sell or Refinance
If you’re thinking about selling or refinancing your home, here are some useful tips.
Understand how much equity you have
Your equity is the difference between what your home is worth and what you owe on it. The more equity you have, the more cash you can borrow with a cash-out refinance or make by selling your home.
Investigate market conditions
The best time to sell is if you can make enough from the sale to afford new housing that better suits your lifestyle, says Blaine Thiederman, a certified financial planner based in Denver. “Your family is happier, you’re closer to things you want to be close to, and you enjoy your life more living in your new home,” he says.
The best time to refinance, according to Thiederman, is when you can “end up benefiting financially within three years.”
Be sure you’ll make money on a sale
Before you sell your home, make sure that you won’t be losing money on the sale.
If property values have dropped, your home may be worth less than you owe on your mortgage. This is known as being underwater on your loan. Selling might not make you enough money to pay off your mortgage, meaning you’ll have to repay any remaining balance out of pocket.
Real estate transactions come with significant closing costs, including real estate agent commissions. Generally, if you don’t have enough equity in your home to cover these costs, you might lose money by selling your home. This often can happen if you refinance before selling or sell shortly after buying.
Compare your existing mortgage rate with current rates
If you refinance your mortgage, you’ll exchange the interest rate on your current loan for the interest rate on a new loan. If market rates are higher than your current mortgage rate, you’ll pay more for your loan. But if they’re lower, you stand to save a lot of money on interest.
Check what loans you qualify for
Just because you have a mortgage, there’s no guarantee that you’ll qualify for a new loan with better terms. This is especially true if your credit score has dropped since you bought your home.
Before you sell your home to buy a new one or refinance, make sure you can qualify for a new mortgage with favorable terms. If you can’t get a new loan with good terms, you might want to hold off on refinancing or selling your home.
FAQ: Refinance or Sell
Choosing between refinancing and selling your home can be simple in some cases. If you need to move, you’ll probably be selling. In other situations, the choice can be much more difficult. It’s important to understand the details of refinancing vs. selling before choosing.
Typically, you can’t refinance if you’re underwater on a home. You’ll also struggle to sell. You’ll need to work with your lender to sell through a short sale or come up with the extra funds to pay off the mortgage balance that remains after the sale.
Refinancing your mortgage costs money, so it can take time to recoup that upfront cost through the savings brought by lower interest rates or monthly payments. If you plan to sell your home soon, refinancing now may not give you enough time to recoup those costs.
It depends on your goals. If you want to stay in your home, refinancing is clearly better than selling. If you have to move, you might want to consider refinancing and renting out your old home, but selling is also a good option.
The Bottom Line on Refinancing or Selling
Refinancing or selling both are options for people who either want to cash out some of their home equity or don’t like the terms of their current mortgage. Once you understand the pros and cons of each, you’ll have a better idea of when it makes sense to take one path or the other, and you’ll be ready to make the best financial move for your situation.
- Census Bureau (2021)
