A mortgage refinance offers you better terms and lowers interest rates enabling you to make lower mortgage repayments.
It can also help to get rid of mortgage insurance and pay off the house faster by adjusting to a shorter loan term. If your house has high equity, you could apply for cash-out refinancing. However, a refinance can make it challenging to sell the house.
It is possible to sell a house after refinancing, but most mortgage lenders have restrictions or penalties to discourage you from doing so.
However, if selling makes financial sense, e.g., in a thriving seller’s market where your house value has appreciated significantly, and the equity is sufficient to pay off closing costs and penalties, then you can proceed to sell.
Mortgage lenders enact an owner-occupancy clause requiring that you stay in the house for 6-12 months before selling or renting. The clause discourages owners from using the house as a rental property. In some cases, the required period is open-ended.
If you sell the house before the time stipulated for residency has lapsed, the lender can take legal action against you and charge you with mortgage fraud.
However, if you have strong reasons for wanting to sell soon after refinancing, consult with your lender to see if there is leeway for selling before the waiting period.
Mortgage lenders charge a fee if you pay your mortgage too early into the loan period as they miss out on the interests. For most, the prepayment penalty applies if you sell the house within 1-2 years.
However, FHA loans and USDA loans do not have a prepayment penalty, so you can sell early on after refinancing as possible.
If you anticipate selling your house soon after refinancing, it is best not to refinance. Aside from the restrictions that the mortgage lender may impose, refinancing can be costly.
It can take up 2-5% of your loan balance. Therefore, you might have to pay the refinancing costs from pocket. If your lender integrates it into your new mortgage, it increases your monthly payments. Overall, the refinancing costs add to your selling and closing costs.
Furthermore, refinancing can lower your credit score, making it difficult to access a new mortgage when buying a new home. If you anticipate selling your house after refinancing, it is best to hold off and negotiate alternatives with your current lender.
Generally, a loan modification is much cheaper than a refinancing as no refinancing costs are involved. Negotiating a modification to pay the loan balance faster can increase your credit score, making it easier to get a loan on your next purchase.
Or, if you are having difficulty keeping up with the mortgage payments, you can request to be allowed to make lower mortgage repayments until you are in a better financial position.
A cash out refi means you get a second mortgage, but the loan amount is higher than the amount owed on the house. Therefore, at closing, the new lender gives you cash back on the difference between your new loan amount and the older one. The cash out enables you to tap on your home’s equity to access a lumpsum amount of money.
However, interest rates and mortgage fees for cash out refinancing are higher than a traditional mortgage or regular refinancing. But, the interest rate is much lower than that of personal loans and credit cards.
You must have a high credit score and debt-to-income ratio to qualify. Most lenders require a loan-to-value ratio of 80% or less. The house should also have high equity, and you can cash out up to 80% of the equity. You can use the money however you like as long as you pay your agreed monthly mortgage payment.
There are different types of cash out refinance loans to consider, including conventional loans from private lenders, a VA loan, and an FHA loan.
A home equity loan is similar to a cash out refinance loan in that it is a second mortgage loan on the house.
However, instead of taking a larger loan from a new lender to pay off the previous lender and get cash back, the second loan is secured against the home value and equity. You get a lump sum of the amount borrowed.
It is a great option if you have gained significant equity and cash flow on the home and are almost paying off the initial mortgage loan. The main advantage of home equity loans is that they have low-interest rates, and you do not have to alter your existing mortgage.
HELOCs are not mortgages. Instead, they enable the homeowner to get a loan on the home equity. It is a revolving line of credit, and borrowers can access the money over time instead of as a lump sum.
Either way, you can use the money to refinance your other projects or to upgrade your house to boost its appraisal value when it is time to sell. Also, HELOCs do not have closing costs.
Below are the key steps for selling a house after refinancing.
Although you do not have to inform the lender about your intention to sell the house until you start to get offers, in the case of a refinance mortgage, it is best to involve them as early as possible. It allows them to bring up any restrictions in case you have missed them.
If there are restrictions, wait for the stipulated time to lapse or negotiate with the lender. If there are none, you can request your mortgage payoff quote to know the exact amount you owe. If you are in the clear, proceed to sell the house.
Decide whether to put up the house for sale by the owner (FSBO) or to hire a real estate agent. Have a real estate agent conduct a comparative market analysis (CMA) to determine a listing/sale price. Then proceed to stage the house for viewing by potential buyers. List it and host an open house or showing.
If you want to sell the refinanced house fast or are having trouble finding a mortgage buyer, sell to a cash buyer. You will not have to repair the house even if it has some problems. If you do not have the cash to meet the closing costs, some cash buyers offer to cover them and deduct the amount from the sale price.
Once you get offers, evaluate them to determine the most suitable buyer, then proceed to close. Use the sale proceeds to pay off the mortgage balance and any other amount owed on the house.
You can use the proceeds to pay your closing costs if the proceeds are sufficient. Otherwise, you will have to pay out of pocket. The title deed cannot be transferred to the new owner until you have paid the outstanding mortgage balance.
How soon you can sell a house after refinancing depends on the terms of the agreement with your lender. If they impose a minimum owner-occupancy period, you will have to wait until it has lapsed to be able to sell without hurting your credit score or being charged with mortgage fraud.
If they have prepayment penalties, you can either wait for the stipulated prepayment period to lapse or sell and pay the penalties. The high refinancing costs can also put you at a disadvantage when trying to sell a house after refinancing.
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