Editor’s Note: We receive a commission from affiliate links on Forbes Consulting. Commissions do not affect our editors’ opinions or reviews.
If you’re thinking of selling your home but need to upgrade before putting it on the market — or if you want to lower your interest rate in the meantime — you can refinance your mortgage before selling your home.
However, there are several things you should know before going this route to make sure it’s the best financial decision for you.
How much can I sell my house for after I refinance?
Many lenders have restrictions on how much you can sell after refinancing your loan. Here are the most common limitations you may encounter.
Articles of ownership
Your lease may contain a clause that prevents you from selling within the first six to 12 months—specifically, if you plan to live in the home as your primary residence. Selling before this time may subject you to legal action by your lender.
If your refinancing agreement does not include this requirement, you can sell at any time after refinancing.
Tip: If you plan to sell your home after refinancing, make sure there is a title clause in the agreement and ask your lender what you need to sell before the grace period ends. Some lenders will allow a sale if you have a strong reason to sell after refinancing.
Your renewal agreement may not have a title clause, but the lender may charge a prepayment penalty. If you pay off your loan early, this fee is paid by some lenders, often within the first two to three years of taking out the loan.
Prepayment penalties are prohibited for certain types of loans, including loans guaranteed by the US Department of Agriculture (USDA) or the Federal Housing Administration (FHA). In other cases, lenders are limited in how much they charge for down payments—sometimes as little as 2% for conventional mortgages.
There are two types of prepayment penalties:
- Severe punishment. Heavy penalties prohibit selling and refinancing within the first three years. If you owe a serious penalty and sell during the term, you will pay some or all of the monthly interest on the remaining balance.
- Soft penalty. This applies to early financing only. You can sell without penalty if you refinance after you exceed the foreclosure period.
Before you sell your home, be sure to review your mortgage to make sure you won’t pay a penalty. Or at least know how much it will be so you’re ready if you decide to pay off the loan early.
When it makes sense to sell after refinancing
If you’re in a seller’s real estate market where home prices are skyrocketing, refinancing may not be an obstacle to selling your home and getting a sky-high valuation.
While remodeling comes with higher closing costs that can reduce some of your profit, it can still be worth it if the benefits of selling your home outweigh the initial remodeling costs.
For example, the Federal Reserve is hiking borrowing costs, which in turn is putting upward pressure on mortgage rates. In such a situation, you may want to refinance to switch from an adjustable-rate mortgage to a fixed-rate mortgage. This way, you can avoid paying extra every month when you are ready to sell.
Or if you’ve built up enough equity in your home, cashing out allows you to withdraw money that you can use to make home improvements before re-listing. This increases the home’s value and appeal to potential buyers once it is on the market.
Before making this decision, consider contacting the listing agent to make sure it’s the right course of action.
Why not refinance before selling?
Refinancing is a costly process. Closing costs typically range from 2% to 5% of the loan balance. So selling a home after refinancing means you’re less likely to get back what you spent on closing.
If you plan to move, refinancing can make it more difficult to get another loan to buy your new home—unless you plan to pay all cash.
Additionally, paying closing costs on a refinance can eat into your money for a down payment on your new loan. Refinancing lowers your credit score, so you may not be able to secure favorable loan terms.
Finally, if your plan is to sell your home and move, it just makes more financial sense to save more money and avoid refinancing.
Options for refinancing your home before selling it
If you’re thinking of selling your home soon, but need to refinance your existing mortgage, there are other options to consider besides refinancing.
You can apply to your lender for a loan modification. This is when you change the terms of your loan, such as the monthly payment, interest rate, and term.
Remodeling is more expensive than renovating—you don’t have to pay closing costs. So if you’re struggling financially and struggling to keep up with your payments, going this route will buy you some breathing room until you sell your home.
No closing-cost restoration
You can apply to a lender that refinances without closing costs. Instead of paying the closing costs up front, the lender will charge you higher interest in combination with your loan amount.
But just because you don’t pay anything at closing, doesn’t mean it’s a cheap option. If you go this route, your monthly payments will be higher, but the damage to your wallet will be less, especially if you plan to sell your home soon.
You need to make sure that the proceeds from selling your home will be enough to pay off the new mortgage principal. Otherwise, you’ll have to come up with the difference yourself that makes you fall back.
Home Loan or Home Equity Line of Credit (HELOC)
If you need money for home repairs before selling, you can consider a home equity loan or HELOC. Both are basically second mortgages that use your home as collateral. But with a HELOC, you only pay interest on the amount you borrow, whereas with a home equity loan, you pay interest on the entire amount.
You can sell after refinancing—but only go ahead if it makes financial sense
If the value of your home has increased significantly compared to when you originally purchased it, it may be worth selling your home after refinancing. This is especially true if the value you get is minus the high closing costs of renovating. If you currently have an adjustable-rate mortgage, you can refinance to a fixed-rate mortgage to keep your monthly expenses stable while you prepare to sell the property.
If you’ve built up at least 20% equity in your home after reducing your current loan balance, a cash-out allows you to spend money on home improvements before re-listing. This increases your chances of attracting strong bids once it’s on the market.
On the other hand, you should avoid refinancing your loan if you don’t expect to live in the home long enough to cover closing costs (and allow your equity to grow). In such a case, the fees you pay to close the refinance can wipe out any profit from the sale.
Related: Best mortgage refinance lenders
Quick, easy mortgage loan
Check your rates today with Better Mortgage.