Are you considering a refi before selling?
There are a number of reasons you might want to refinance your home before selling it.
You may want to cash out home equity for repairs. Maybe you've already moved and are paying two loans. Or maybe you're just looking for a lower interest rate and lower monthly payment.
Understand that most lenders will not allow refinancing if the home is already up for sale.
However, if it isn't listed, there isn't a rule that says you can't sell your home after you refinance.
However, there are times when you run into some roadblocks. Here's what you should know:
Check your refinancing eligibility (February 15, 2021).
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How Fast Can You Sell Your Home After Refinancing?
Many mortgage lenders don't dictate how often you can refinance your mortgage. However, you can place restrictions on how quickly you can sell after refinancing.
Depending on the language in your refinancing agreement, you may have a self-use policy that prevents you from selling (or renting) the home within the first 6 to 12 months after the refinance.
By signing the refinancing documents, you confirm that you “intend to use the house as your primary residence for a period of normally one year”.
If your agreement does not include this provision, you can always sell it after the refinancing.
If your agreement includes this clause, an early sale can create legal problems with your lender.
The good news is that this is not a hard and fast rule. Some lenders will not enforce this clause unless you have extenuating circumstances or a valid reason to sell in this window.
If you want to sell after the refinance, be sure to check for condominium clauses in the refi agreement and ask your lender what they consider to be an acceptable reason to sell before the waiting period is up.
Even if your refinancing arrangement does not contain a self-use clause, your arrangement could result in an upfront penalty.
This is a fee that some lenders charge when a borrower repays their mortgage loan early, usually within the first three years of receiving the loan.
Most new mortgage loans have no prepayment penalties. However, be sure to check your mortgage papers to confirm this before selling your home.
In cases where this is the case, there are two types of prepayment penalties: a hard penalty and a soft penalty.
A hard penalty limits both sales and refinancing within the first three years, while a soft penalty only applies to refinancing.
If you have a stiff penalty and you sell within the penalty period, you either pay a percentage of the remaining loan balance or a certain number of monthly interest.
This is important information as prepayment penalties are costly.
Let's say you have a 2% prepayment penalty and $ 200,000 in credit balance. In this example, you would pay your lender $ 4,000.
Here too, prepayment penalties are rare; However, if your loan does not have an opportunity, it should be clear about this before selling.
Check your refinancing eligibility (February 15, 2021).
Can You Refinance While Your Home Is Up For Sale?
There are several seemingly good reasons to refinance while your home is up for sale.
Your adjustable rate mortgage may be resetting and you may want to get a fixed rate mortgage in case the property does not sell. Or you've already moved and are currently paying two mortgages.
Even if you have a valid reason to refinance after listing your home, you should be aware that many lenders will not refinance in these circumstances.
If you want to refinance while the home is listed, you may need to remove the listing and keep it off the market for 3-6 months.
From a lender's perspective, you do not intend to live your home long term. Hence, approving the refinancing is too risky.
You may find another home before renting or selling this one and defaulting on your old mortgage.
Lenders need to protect themselves. You may have to pay foreclosure costs when refinancing property for sale. The mortgage defaults on the secondary market after it is sold.
So, in most cases, you can't refinance your home while it's up for sale. The lender requires you to remove the listing and you may need to keep them off the market for at least three to six months.
However, there are likely some non-traditional lenders, hard money lenders, and others considering a property that has just been removed from a sale list.
Is it a good idea to refinance just before you sell?
Even if you are given the green light to refinance immediately before the sale, should you do so?
First, let's outline a few reasons someone might consider refinancing before selling their current home.
Reasons You May Want To Refinance Before Selling
As mentioned earlier, if there is a surge in mortgage rates, you can refinance yourself to quickly convert a variable rate mortgage to a fixed rate mortgage and avoid a potentially higher rate.
Some homeowners may want to refinance for a better interest rate and monthly mortgage payment to save money while they prepare for the sale.
Or maybe you want to get some cash out of your equity with a payout refinance. If you have enough equity, you can use the money to improve the property before listing.
This could potentially add value to the home and help you get a better deal from home buyers when you sell.
Cons of Refinancing Before Selling Your Home
While you may have good reasons to refinance before you sell, it doesn't always make financial sense to do so.
Remember that refinancing is not free. There are closing costs to consider, which are between 2% and 5% of the loan balance – just like when buying the house.
If you sell a home after it has been refinanced, you are less likely to get back your closing expenses.
For example, if you pay $ 5,000 in closing costs and the refinance reduces your mortgage payment by $ 250, you will need to live in the house for at least another 20 months to break even.
If you are planning a move, refinancing could make qualifying for a mortgage on your new home a little more difficult.
For example, paying closing costs could reduce the savings on a down payment on your new loan. Applying for refinance can damage your credit score by a few points, which can potentially affect your future interest rate more than you think.
Generally, if you're looking to move, it makes more sense not to refinance and instead use your money towards the down payment and closing costs of your next property.
Is refinancing without closing costs a good idea?
You might ask: Couldn't I just get a refinancing with no closing costs?
This is a good question, but it is important to understand how a no closing mortgage loan works.
The advantage of this strategy is that you don't have to pay the closing costs out of pocket. The downside is that if you refinance the cost without closing, you will typically pay a higher mortgage rate to compensate the lender who pays these fees.
Or the lender simply rolls the closing costs into your new mortgage, adding to your overall mortgage balance.
Although you can keep money in the bank with a zero-closing refinance, you pay the price differently.
Still, it might be a good idea – but only if a higher rate still translates into monthly savings, or if closing costs are factored into the balance, won't it put too much pressure on your home equity.
If you think you will be selling in the near future, make sure you understand the refinancing agreement before proceeding
Look for a self-use clause, prepayment penalties, and count upfront costs to determine if a refinance makes financial sense.
You should only refinance if you see real financial benefit – not just a lower interest rate.
What are the current refinancing rates?
Today's refinancing rates are at historic lows. Many homeowners can save by refinancing. However, if you're looking to sell in the near future, a refi isn't always the best move.
If you're on the fence, speak to a loan officer or mortgage broker who can help you explore your options.
Before you sign up, you should understand exactly how refinancing will affect your personal finances and home ownership plans in the short and long term.
Check your new plan (February 15, 2021)