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Should I Refinance My Home if I Plan to Sell?
Should I refinance my home if I plan to sell is a common question many homeowners looking to take advantage of the benefits of refinancing. In this article we will discuss the pros and cons of refinancing if you plan on selling your home in the near future.
Reasons To Refinance
What exactly is a refinance? Simply put, a refinance is when you pay off your old loan and replace it with a new one.
There are various refinancing alternatives available to you. Let’s look at some of the most common reasons people decide to refinance.
Extend the term of your mortgage
A refinance allows you to extend the term of your mortgage. This provides you additional time to pay off your debt while also lowering your monthly payment.
Reduce Your Term
You can also refinance to a loan with a shorter term. Shortening your mortgage term increases your monthly payment, allowing you to buy your house sooner and save thousands of dollars in interest.
Lower Your Interest Rate
Are interest rates today lower than they were when you purchased your home?
If so, refinancing to a lower rate will cut your monthly payment and save you money in the long run.
If your credit score has improved since you purchased your house or you’ve paid off other loans, you may be eligible for a lower interest rate.
Modify the Loan Structure
Do you have an adjustable-rate mortgage right now? If you’ve gone above the fixed period, the amount of interest you pay each month can change dramatically.
It is feasible to refinance from an ARM to a fixed-rate loan, ensuring that your monthly payment remains consistent.
This makes your monthly payments more predictable, which is beneficial if you have a tight budget.
Alter the Loan Type
As soon as they have adequate equity, many homeowners refinance their government-backed loans to conventional loans.
If you put down less than 10% on a home, for example, you’ll have to pay a mortgage insurance fee for the life of the loan.
If you have a traditional loan, however, you can remove private mortgage insurance after you reach 20% equity.
If you have an FHA loan with at least 20% equity in your house, you can refinance to a conventional loan.
Take Money from Your Equity
You can accept a greater principal balance and take the difference in cash with a cash-out refinance.
Consider the following scenario: you owe $100,000 on a $100,000 mortgage.
You want to add a pool to your house for $10,000, but you don’t have the funds.
A cash-out refinance would require you to take on a loan with a principal balance of $110,000.
Your lender would offer you $10,000 in cash a few days after you close in exchange.
You can utilize the money from a cash-out refinance for nearly any reason, unlike other types of loans.
To pay off debt, many homeowners use cash-out refinances. This is due to the fact that mortgage loans have lower interest rates than credit cards and other types of borrowing.
Is It Possible to Sell Your Home After Refinancing?
Even if you want to sell your property, there is no legislation that prevents you from refinancing.
Due to the fees of closing on a refinance, this is rarely advantageous to you as the buyer.
Closing expenses must be paid before your new loan can be finalized when you refinance your mortgage.
Closing expenses go to your lender and pay services related with settling your loan, just like when you bought your house.
When you refinance, you may encounter the following closing costs:
➣ Application cost: When you apply for a refinance, some lenders charge a fee. Even if your lender rejects your loan application, you must pay this cost.
➣ Appraisal fee: Your lender will almost always order another appraisal when you refinance. The assessment is crucial because it ensures that the lender is not lending you more money than your home is worth.
➣ Inspection fees: Some states need a second inspection before a refinance may be completed. If you refinance to a government-backed loan, you may also need an examination.
➣ Attorney review and closing fee: In some areas, your refinance closing must be handled by a real estate attorney.
➣ Title search and insurance fees: If you refinance with a new lender, you may need to pay for a fresh title search to guarantee your home is free of liens. It’s possible that you’ll have to pay for title insurance again.
Closing fees vary depending on the sort of loan you have, where you live, and who you’re dealing with.
Closing expenses typically range between 2 and 3 percent of the entire loan amount.
That means that if you refinance a home with a $150,000 outstanding balance, closing expenses will likely range between $3,000 and $4,500.
How Long Would It Take to Break Even on A Refinance?
When deciding whether to refinance if you’re also planning to sell your house, it’s crucial to evaluate how long it will take for the refinance savings to match the refinance costs. The break-even point is what it’s called.
Due to closing costs, the money you save when refinancing is frequently not visible until a few months into your loan.
This is why, unless you expect to stay in your house for at least another 5 years, refinancing your mortgage is usually not a good idea.
Consider the following scenario. Consider a $150,000 loan with a 4% annual percentage rate and 15 years left on the term.
Before property taxes and insurance, your monthly mortgage payment is $1,109.53 in this case.
Interest rates have dropped since you took out your loan, and your lender says you may be eligible for a refinance.
When you apply, you’ll notice that you can get a 3.5 percent APR while keeping your loan period the same. You refinance and make a $3,000 closing payment.
Your mortgage payment is now $1,072.32 per month. This means you’ll be paying $37 less each month on your loan.
It will take 81 months (or 6.75 years) to save the amount you paid in refinance closing expenses with your new lower payment.
You will lose money if you sell your house shorter than 6.75 years after refinancing.
This is why most lenders advise against refinancing if you want to sell your house within the next several years.
Remember that government mortgage laws may be more stringent or outright prohibit you from refinancing before selling your house.
When you sign an FHA loan refinance, for example, you promise to live in your house for at least a year as your principal residence.
It’s against the regulations to put your house on the market as soon as your refinance is completed.
When Should You Sell Your Home After Refinancing?
In our pandemic economy, the housing market in the United States has been in a prolonged seller’s market, fueled by low inventory and high demand.
Home values have risen dramatically in some parts of the country, particularly in cities like Austin, Texas.
You may believe that a recent refinance stops you from cashing in by selling your property if you live in a quickly appreciating real estate market.
It’s true that if you sell before reaching the break-even threshold, you’ll lose money on the refinance, but that loss may be insignificant compared to the profit you’ll make if you list your house.
It can be worthwhile to speak with a listing, or seller’s, real estate agent to determine the current value of your home.
Is It Possible to Refinance While Your House It’s on the Market?
If your home is on the market, you may be able to refinance your loan. Finding a lender who is willing to work with you, though, may be tough.
Even if you find a lender ready to refinance your mortgage, you should be aware that your new loan may include a prepayment penalty condition.
This means that if you pay off your loan early in its term, you’ll still be responsible for the interest you would have paid otherwise.
Ask your lender about prepayment penalties and when they expire if you want to refinance while your home is on the market.
Refinancing Alternatives
So, you know you want to refinance, but you also know you want to sell your house soon. What are your options? Let’s look at some of your alternatives.
Make a Loan Modification Request
A refinance is not the same as a loan modification. Your lender agrees to amend the conditions of your loan if you seek a loan modification, and you can change your monthly payment, interest rate, and term.
In very unusual circumstances, your lender may agree to forgive a portion of your principal debt.
Refinancing is more expensive than loan modifications. This makes them an excellent choice if you’re having difficulties paying your payments before selling your house and downsizing.
Keep in mind, however, that lenders are under no obligation to comply with your request or to negotiate your loan conditions.
Refinance with No Closing Costs
Your lender may offer you a no-closing-cost refinance when you apply for one.
Your closing costs will be rolled into the principal of your loan. You pay a little higher interest rate in exchange for not having to pay anything out of pocket at closing.
If you refinance a $100,000 loan, closing expenses could be $2,000, for example. With a no-closing-cost refinance, you’d pay nothing at closing and take a loan with a $102,000 principal.
The term “no-closing-cost refinance” is misleading because you will have to pay your closing expenses at some point throughout the loan’s life.
If you’re planning to sell your property soon, you might just have to pay a few extra dollars every month.
If you want to cash out your equity and make repairs before selling, a no-closing-cost refinance can be a terrific alternative.
However, you should make sure that the proceeds from your home sale are sufficient to pay down your new mortgage principal. If there’s a difference, you’ll have to pay it in cash.
Hold Off on Refinancing
If you’re still contemplating whether to sell your house now or wait, it’s usually a better financial decision to delay your refinance.
Calculate how long you’ll need to live on your property to recoup your closing costs.
If you don’t anticipate on staying in your property long enough to recoup your costs, refinancing is an excellent choice.
Do you wish to make repairs or improvements to your home? If this is the case, a home equity loan, often known as a HELOC, may be a better option than a refinance.
Keep in mind that Rocket Mortgage® does not presently offer HELOCs or home equity loans.
Should I Refinance My Home if I Plan to Sell Conclusion
While you can refinance your property before selling it, it’s usually not a good idea. Closing costs are nearly usually required when refinancing.
Closing expenses might range from 2% to 3% of the loan amount. If you only expect to stay in your house for a few years, closing fees may outweigh any benefits you obtain.