Should You Sell Your Home After Refinancing? Factors to consider
In many cases, there are no legal barriers to selling your home after refinancing. But most homeowners choose to wait to sell their home past the break-even point. If the owner sells before breaking even, the cost of their refinancing is greater than their savings from the transaction.
Beyond break-even, prepayment penalties and homeownership requirements can cause you to delay selling your home. Here’s a closer look at each of the factors to consider before putting the sales panel up front.
Break-even point is an important factor to consider when selling your home after refinancing. Essentially, the break-even point is when the cost of refinancing is offset by the savings you realize from refinancing. You’ll probably want to wait until you break even to make sure you recoup the costs of refinancing before you sell.
Here’s how to calculate your own break-even point.
Let’s say you had 15 years left on your original 30-year loan and a balance of $200,000 at 5% APR. At this point, your monthly payment is approximately $1,074, excluding taxes and insurance.
You find a mortgage lender willing to offer you the same loan term with an APR of 4%. After refinancing, your new monthly mortgage payment is $955 per month. That means you save $119 per month. But you had to pay $8,000 in refinance fees to finalize the loan.
You can now find the break-even point by dividing the $8,000 refinance fee by your monthly savings. In this case, it would take around 67 months, or just over 5.5 years, to break even on refinancing costs. After this point, your monthly savings are pure profit.
Typically, the costs of a refinance range from 2% to 6% of the loan balance. So if you’re refinancing $100,000, you should expect to pay between $2,000 and $6,000 in closing costs.
Your lender will provide you with a summary of these costs well before you sit down to the closing table. With these numbers in hand, you can determine the break-even point for your unique situation.
Beyond the break-even point, you will need to consider the details of your loan product before going to market. Specifically, you will want to determine if your mortgage has prepayment penalties attched.
Some lenders charge this fee if you prepay your mortgage. Although the exact details of prepayment penalties vary, they are often in place for the first 2-3 years of your loan term. But many lenders, such as Rocket Mortgage®do not charge any type of prepayment penalty.
As a borrower, you should take a look at your mortgage documents to determine if there are any prepayment penalties. If going through the fine print doesn’t help, call your mortgage lender. They should be able to tell you if a prepayment penalty is necessary.
If a prepayment penalty is tied to your mortgage, be sure to factor this into your plans. In some cases, the appreciation in the value of your home will offset the prepayment penalty. But in other cases, you might have to pay thousands of dollars out of pocket selling before the prepayment penalty goes away.
Owner Occupancy Requirements
When you refinance, some lenders add an owner occupier clause to the loan. Specifically, it means the lender requires you to live in the property for a certain period of time.
The lender decides if this clause is added to your refinance. But it is common in FHA loan refinancing solutions. If there is an owner occupier requirement, you will likely need to live in the home for at least a year before selling it.
If your mortgage has this clause, you will have to wait to sell the house until you have held up your end of the bargain.
If you still decide to go ahead with the sale, you expose yourself to legal action from the lender. Since no one wants the hassle of a lawsuit, avoid an owner occupancy clause and wait to sell until you’ve passed that requirement.