Refinancing Your Mortgage Before Selling: What to Know

Refinancing a mortgage is a smart financial decision for many homeowners. It can lower your monthly payment, reduce your interest rate, or you can take some cash out of the equity at the lowest possible rates. However, you can lose money if you refinance your mortgage one or two years before selling.

This article walks you through all the considerations of refinancing before selling your home and when it’s a smart financial move. It’s important to note that by refinancing, the total finance charges may be higher over the life of the loan.

Can You Sell Your House After Refinancing?

Yes, you’re often able to sell your home after going through a mortgage refinance, but there are some factors to keep in mind to ensure the timing is right for you, your finances, and your homeownership goals.

For example, you may want to consider the closing costs associated with refinancing, how much equity you’ll walk away with, changes in mortgage rates, and potential prepayment penalties, though rare. You should also verify any restrictions around refinancing with your lender.

When Is the Best Time to Sell After Refinancing?

Plans to sell your home can affect your ability to refinance and the potential benefits of doing so. Here are some factors to consider when refinancing and selling are both in your future:

Refinancing Closing Costs

Refinancing your mortgage has costs involved, often between 2% and 6% of the loan amount. So if you have a $300,000 loan balance, your refinance costs could range from $6,000 to $18,000. That’s why understanding your refinance break-even point is critical. It tells you when you’ve paid off enough of your mortgage for a refinance to present savings opportunities instead of actually costing you more in the long run.

Reduced Home Equity

Refinancing can affect the amount of home equity you have when you sell. A traditional rate-and-term refinance doesn't usually change your loan principal by very much, but a cash out refinance does. With a cash out refi, you borrow against the equity you've built in your home, increasing your mortgage balance. When you sell, the remaining balance must be paid off from the sale proceeds before you get any funds. As a result, the more you owe on the loan, the less equity you’ll take away from the sale.

Market Interest Rates

Whether refinancing is a smart financial decision often depends on current mortgage rates. If mortgage rates have dropped since you took out your original loan, your monthly savings may be higher and your break-even point shorter. If interest rates haven't moved much or have gone up, the savings probably may not justify the cost of refinancing.

Prepayment Penalties

While very rare, some lenders charge prepayment penalties when a loan is paid off early. When you sell your home, you’re required to pay off the remaining balance, and a prepayment penalty could add to how much you owe. If a penalty does apply, factor that additional cost into your break-even calculation before deciding whether refinancing makes sense. Keep in mind that Freedom Mortgage never has prepayment penalties on any of our mortgages.

Examples of Refinancing Before Selling Your Home

Refinancing before selling can make sense when the timeline is long enough to justify the expense. Here are some example scenarios of how the selling timeline can impact your refinancing goals:

• Selling within a year: If you're planning to sell within the next year, refinancing may not provide enough time to recover the closing costs through monthly savings.
• Selling in one to three years: If you expect to sell within the next few years, refinancing may or may not make financial sense. Compare the refinance closing costs to your projected monthly savings to estimate your break-even point. If you'll reach that point before selling, refinancing could provide some benefit. If not, the upfront costs may outweigh the savings.
• Selling in several years: If you expect to stay in the home for several more years and can secure a lower interest rate, refinancing may reduce your monthly payments enough to offset the upfront costs.

Put simply, even if you’re able to sell soon after refinancing, you might not have enough time to recover the costs associated with refinancing to make it worth it. If you’re planning to sell years down the line, refinancing in the meantime could be a chance to save if you’re eligible for a lower mortgage rate.

Alternatives to Refinancing Before Selling

If refinancing doesn’t make sense given your situation, you have a few other options worth exploring.

• Tap into your equity: If you need money before selling, you don’t have to refinance your entire mortgage. A home equity line of credit (HELOC) allows you to borrow against the home’s value as needed, as a credit line, and is an alternative for a cash out refinance.
• Wait to refinance: If a sale isn't imminent but likely, waiting may be the smarter move. It gives you more time to find the best time to refinance based on interest rates and how your financial situation changes between now and then.
• Sell without refinancing: If your current payment is manageable and you are selling soon, refinancing adds cost and hassle without improving your finances.
• Look into loan modification: If your goal is lowering your monthly loan payments because money is tight, a loan modification through your current servicer might help. It can adjust your interest rate or loan term without requiring the same upfront costs as refinancing.

Final Thoughts: Should You Refinance Before Selling?

Refinancing before selling can be a smart financial move, but only when the timing and numbers line up. If you have a few years before you sell and can lock in a noticeably lower rate, refinancing may be worth it. If you're selling soon, the closing costs alone are likely to cancel out any refinance savings.

The best thing you can do is review your current loan, figure out how long it would take to break even if you refinance, and understand any restrictions on changing your mortgage before selling. A Freedom Mortgage loan advisor can help you work through the numbers and figure out whether refinancing before selling makes sense for you.

Get started with Freedom Mortgage today!

*By refinancing, the total finance charges may be higher over the life of the loan.