Are you considering a refi before you sell?

There are a number of reasons you might want to refinance your home before selling it.

Maybe you want to cash out home equity for repairs. Maybe you’ve already moved and you’re paying two loans. Or maybe you’re just looking for a lower interest rate and monthly payment.

Understand most lenders won’t let you refinance if the home is already listed for sale.

But if it’s not listed, there’s no rule that says you can’t sell your house refinancing.

However, you might run into a few roadblocks. Here’s what you should know. 

In this article (Skip to…)

• How soon can you sell after refinancing?
• Refinancing while your home is listed for sale
• Is it a good idea to refinance before selling?
• What about a no-closing-cost refinance?
• Today’s refinance rates

Many mortgage lenders don’t dictate how often you can refinance your mortgage. But they might impose restrictions on how soon you can sell after refinancing.

Owner-occupancy clauses

Depending on the language in your refinance agreement, you may have an owner-occupancy stipulation that stops you from selling (or renting out the house) within the first 6-12 months after refinancing. 

By signing the refinancing paperwork, you affirm that you “intend to occupy the home as your primary residence for a period of usually one year.” 

If your agreement doesn’t include this stipulation, you can sell at any time after refinancing.

But if your agreement does include this clause, selling too soon could trigger legal issues with your lender. 

The good news is that this isn’t a hard and fast rule. Some lenders will not enforce this clause if you have extenuating circumstances or a valid reason for selling within this window.

If you plan to sell after refinancing, make sure to look for owner-occupancy clauses in the refi agreement and ask your lender what it considers an acceptable reason to sell before the waiting period is up.

Prepayment penalties

Even if you don’t have an owner-occupancy clause in your refinance agreement, your agreement might have a prepayment penalty.

This is a fee that some lenders charge when a borrower pays off their mortgage loan early, usually within the first three years of getting the loan.

Most new mortgage loans do not have prepayment penalties. But make sure you review your mortgage paperwork to confirm this before selling your home. 

In cases where one does apply, there are two types of prepayment penalties: a hard penalty and a soft penalty. 

A hard penalty restricts both selling and refinancing within the first three years, whereas a soft penalty only applies to refinancing. 

If you have a hard penalty and sell within the penalty-period, you’ll pay either a percent of the remaining loan balance or a certain number of month’s worth of interest.

This is need-to-know information because prepayment penalties are costly.

Let’s say you have a 2% prepayment penalty and a remaining loan balance of $200,000. In this example, you would pay your lender $4,000.

Again, prepayment penalties are rare; but on the off chance your loan has one, you’ll want to be aware of it before selling.

Or, maybe you want to pull a little cash from your equity with a cash-out refinance. If you have enough equity, you could use the money to make improvements to the property before listing.

This could potentially increase the home’s value and help you get a better offer from home buyers when you do sell.

Drawbacks to refinancing before you sell your home

Although you might have good reasons for refinancing before selling, it doesn’t always make financial sense.

Remember, refinancing isn’t free. There are closing costs to consider, which range from 2% to 5% of the loan balance — the same as when you bought the home.

Selling a house after refinancing means you’re less likely to recoup what you spend at closing.

For example, if you pay $5,000 in closing costs, and refinancing reduces your mortgage payment by $250, you’ll need to live in the home for at least another 20 months to break even.

In addition, if you plan to move, refinancing could make qualifying for a mortgage on your new home a little more difficult.

For instance, paying closing costs could reduce savings for a down payment on your new loan. And applying for a refinance could take a couple of points off your credit score, which might have a bigger impact on your future interest rate than you’d think.

If you plan to move, it generally makes more sense to refinance, and to put your cash towards the down payment and closing costs on your next property instead.

This is a good question, but it’s important to understand how a no-closing cost mortgage works. 

The benefit of this strategy is that you avoid paying closing costs out of pocket. The downside is that a no-closing cost refinance typically involves paying a higher mortgage rate to compensate for the lender absorbing these fees. 

Or, the lender might simply roll the closing costs into your new mortgage, thus increasing your total mortgage balance.

So although a no-closing cost refinance lets you keep money in the bank, you’ll pay the price in other ways. 

Still, it could be a good idea — but only when a higher rate still results in monthly savings, or when rolling closing costs into the balance doesn’t cut too much into your home equity. 

And if you think you’ll sell in the near future, make sure you understand the refinance agreement before moving forward 

Look for an owner-occupancy clause, prepayment penalties, and count the upfront cost to determine whether refinancing makes financial sense.

You should only refinance if you’ll see a real financial benefit — not a lower interest rate.

Verify your new rate (Feb 15th, 2021)