Sometimes after refinancing a mortgage, homeowners might find themselves in a situation where they want or need to sell their home. If you’ve gone through the time and effort to refinance, you may be wondering if it’s worthwhile or even possible to sell.
The good news is there’s nothing barring you from selling your home, even if you’ve just refinanced. There are, however, some major financial considerations to think about.
Here’s what you need to know if you decide to sell your home after refinancing:
- How Soon Can I Sell My House After Refinancing?
- Why You Might Not Want To Refinance Before Selling
- How Long Does It Take To Break Even on a Refinance?
- When Does It Make Sense To Sell After Refinancing?
- FAQ: Can You Sell Your Home After Refinancing?
- The Bottom Line on Selling Your Home After Refinancing
How Soon Can I Sell My House After Refinancing?
There’s no law or regulation that says you can’t sell your home immediately after refinancing.
However, if you refinance and sell your home before the break-even point, you will likely lose money.
Some loans may include an owner-occupancy clause that requires the owner to live in the home as their primary residence for a certain time after refinancing.
Lenders also commonly charge prepayment penalties to borrowers who repay their loans early — even if you’re selling out of necessity.
Why You Might Not Want To Refinance Before Selling
There are several reasons why refinancing your mortgage before selling may not be a good move for most homeowners.
Costs of refinancing your home
Refinancing can be a great move financially, but it requires you to pay closing costs on your new loan upfront, which average about $5,000 on a refinance.
Craig Stelzer, branch manager at CrossCountry Mortgage in Delray Beach, Florida, recommends budgeting for refinance closing costs to total between 1% and 3% of the loan amount. That means if you’re refinancing your home with a $300,000 mortgage, you can expect to pay between $3,000 and $9,000 in closing costs.
Refinancing usually saves homeowners money, though it takes some time for those savings to recoup the closing costs. Selling your home right after a refinance gives you no time to find that break-even point, and will reduce any profit you might see from a sale up to you taking a loss on the home.
So, if you plan to sell your home, it may not make sense to take on those additional costs since you’ll pay off your mortgage when the home is sold.
Owner-occupancy clauses
This clause in your mortgage agreement may restrict you from selling your home for the first six to 12 months after closing on a refinance. Additionally, it requires you to keep that home as your primary residence, rather than an investment or vacation home.
If your mortgage has an owner-occupancy clause, and you’re still eager to sell, consider calling your lender to discuss the situation. If you have a strong reason for selling the home, you may be able to negotiate a deal with your lender.
Negative equity in your home
Refinancing your home has many benefits, but it’s also possible to find yourself with negative equity in your home.
Also known as being underwater on a loan, negative equity is when a borrower owes more on their home than it’s worth. This means if you sell the property, the proceeds wouldn’t be enough to pay off the loan, and you’d be unable to refinance.
In that case, it might be best to keep the home, if you can. Eventually, your payments would reduce the loan balance enough for you to regain equity in the home, and once you finish repaying the loan, you’d have 100% equity.
Prepayment penalties
Lenders supply money for home purchases with one primary goal — to make money via your interest payments. But if you decide to sell your home and pay off the mortgage after you refinance, the lender loses out on that income. Moreover, the majority of the interest paid on a mortgage is in the first years of repayment, thanks to a process called amortization. If you sell your home early on in your mortgage agreement, the lender will want to collect a prepayment fee to compensate for the revenue it will miss out on the interest you’d pay over the life of the loan.
How Long Does It Take To Break Even on a Refinance?
Most homeowners refinance their mortgage because it saves them money in some way, such as a lower interest rate, a shorter payoff schedule, or a lower monthly payment.
But when you look at the big picture, it takes time for those savings to recoup the cost of refinancing. This is called the break-even point, and reaching it can take months or even years.
Let’s say it costs $5,000 in closing costs to refinance your mortgage, and the result is the monthly payment is reduced by $150. It will take you just over 33 months — nearly three years — for the savings from that lower payment to surpass the $5,000 cost to refinance. It’s from that break-even point onward that refinancing actually saves you money.
The general rule of thumb to recoup refinance costs is two to three years maximum, according to Stelzer.
“Anything beyond that may not be worth it,” he says.
When Does It Make Sense To Sell After Refinancing?
Even if you’re able to sell your home without penalties from your lender, you’ll still need to decide when selling after a refinance makes sense.
If interest rates are going up and you want to reduce the possibility of increased monthly payments as you prepare to sell your house, then refinancing from an adjustable-rate mortgage to a fixed-rate mortgage may make sense. In this case, the goal of selling your house may be more important to you than the costs of refinancing.
A cash-out refinance would let you borrow some of your equity as cash that you could use to pay for improvements or renovations before selling your home. If your home is in a competitive market with rapid increases in home values, those renovations could boost your home’s value enough to recoup your refinancing costs and increase your profit.
FAQ: Can You Sell Your Home After Refinancing?
Here are answers to some frequently asked questions about selling your home after refinancing.
Technically, yes. However, it may be difficult to find a mortgage lender that is willing to work with you. This is because the lender will have very little chance to make a profit since the loan would be closed out when you sell.
When you’re refinancing your home, be sure to keep track of the overall cost and mounting fees. Shop around for the best mortgage offer by comparing lenders in your area so you can get the best loan possible.
No, you don’t need to pay taxes on a cash-out refinance. The IRS doesn’t recognize these funds as income, so you can take the equity out of your home and use the funds as you please without any tax implications.
A refinance is restructuring your loan with your current lender or a new one. A sale is transferring a property deed from one person to another, which is a different process.
The Bottom Line on Selling Your Home After Refinancing
Selling your home after refinancing can be a good idea when the circumstances make sense. But generally, if you refinance your home for better lending terms, it’s most beneficial when you have enough time to use that mortgage to your advantage. So, if you’re intent on refinancing, be sure to run the numbers on how much refinancing will cost and how long it will take for you to recoup the costs.
Rory Arnold contributed to the reporting of this article.
- Freddie Mac
