Did you know that you can refinance your mortgage before you sell your home? There are a few reasons why this can be a good idea.
Maybe you want to cash out home equity for some repairs before putting your home on the market. 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 to bank some cash before you move.
You usually cannot refinance your loan once you have already listed your home for sale. But if it’s not listed, there’s no rule that says you can’t sell your house after refinancing. However, while most mortgage lenders don’t dictate how often you can refinance your mortgage, they could impose restrictions on how soon you can sell after refinancing. 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. If your agreement doesn’t include this stipulation, you can sell at any time after refinancing.
But is that a good idea? Let’s do a little more digging into the reasons why it could make sense and some of its drawbacks.
Reasons you may want to refinance your mortgage before listing your house for sale:
- If mortgage rates are on the upswing, you might refinance to quickly convert an adjustable-rate mortgage to a fixed-rate mortgage and avoid a possibly higher rate down the road.
- Some homeowners might want to refinance for a better interest rate and monthly mortgage payment to save money while preparing to sell.
- 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 of refinancing before selling:
- There are fees and costs involved. 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.
- If you plan to move, refinancing could make qualifying for a mortgage on your new home a little more difficult.
In summary, there are no rules that say you cannot refinance your mortgage before putting your home on the market. There could be a restriction on how soon you can put your home for sale after a refinance. There are circumstances when refinancing before putting your home up for sale is advantageous for you. Generally speaking, however, if you plan to buy a new home and move, it makes more sense not to refinance and to put your cash towards the down payment and closing costs on your next property instead.