Updated August 28th, 2019
If you've recently refinanced your mortgage and now want to sell or you're thinking about refinancing before selling, there are few things that might affect how soon you can sell after a refinance.
Some clauses in mortgage contracts can keep you from selling or force you to pay a penalty if you pay off your mortgage too soon.
Before you decide to sell after a refinance, get the advice of an expert realtor to make sure you don't have problems when closing the sale, pay any unnecessary fees, and get top dollar for your house.
In the meantime, let's explore what could keep you from selling your house right away after a refinance.
How long after refinancing can you sell your house?
You can sell your house right after refinancing — unless you have an owner-occupancy clause in your new mortgage contract. An owner-occupancy clause can require you to live in your house for 6-12 months before you sell it or rent it out. Sometimes the owner-occupancy clause is open ended with no expiration date.
If you sell your house before the owner-occupancy clause in your contract expires, you may run into problems with your mortgage company during closing. Check your loan documents for any owner-occupancy clauses. If you don't have one, you should be good to go.
Another clause that may apply to you which doesn't keep you from selling your house after refinancing but can make it expensive is a prepayment penalty clause. A prepayment penalty is a fee that could apply if you sell your house too soon after refinancing. If you have a prepayment penalty, your mortgage company must make it clear on any correspondence that they send to you.
Can you sell your house right after refinancing?
Sometimes you can sell your house right after financing. If you've just refinanced your house and you want to sell, make sure that there are no requirements for you to live in the house for a certain period after refinancing.
Your mortgage contract could have an owner-occupancy clause that requires you to live in the house for a certain period after refinancing. The requirement could be 6-12 months or longer. If you don't have an owner-occupancy clause, there is nothing to keep you from selling.
Be aware that you might have a prepayment penalty clause in your mortgage contract. A prepayment penalty clause can require you to pay a fee based upon a percentage of your outstanding principal, or a certain number of months' interest, if you pay your loan off early. If you have a prepayment penalty clause, it's supposed to be clearly written on any correspondence from your mortgage company such as payment coupons or your monthly statement.
Does your mortgage have a prepayment penalty?
A prepayment penalty is a fee your lender can charge you if you pay your loan off early. A prepayment penalty can be expressed as a percentage of the principal balance or a specified number of months interest. This can result in an additional fee of thousands. For example, if you have a 3% prepayment penalty and a principal balance of $200,000, the prepayment penalty would be $6,000.
Prepayment penalties are limited for mortgages that don't meet certain standards by a new law effective January 2014 in accordance with the Dodd-Frank Act of 2010. But the law is not retroactive. If you refinanced before 2014, you may still have a prepayment penalty.
Also, the new law doesn't apply to all mortgage types. If you have excellent terms on your mortgage, you may still be subject to a prepayment penalty if you financed after 2014 and your new mortgage meets all the following requirements:
- The loan rate is not higher than The Average Prime Offer Rate (APOR). The Average Prime Offer Rate changes constantly and is based on average interest rates, fees and length of loan terms offered to highly qualified borrowers.
- The loan is a Qualified Mortgage. A Qualified Mortgage has better terms such as a loan period of no more than 30 years and no risky features such as interest-only payments.
- The loan rate will not increase such as a fixed-rate loan.
Remember that any refinancing after the enactment of the Dodd-Frank Act in 2014 that has a prepayment penalty attached to it should only be effective for three years and cannot be more than 2% of the total amount of the loan during the first two years after refinancing it. This then drops to 1% of the total during the final year.
How do you know if you have a prepayment penalty?
By law, your lender is required to disclose any prepayment penalty fee on your monthly mortgage bill, your mortgage payment coupon book if you have one, and any communication you receive from your lender about your loan, including information about payments and interest rates. Your mortgage note should also clearly disclose the prepayment penalty fee in your contract.
If you refinanced after 2014 and you have a prepayment penalty listed on your mortgage correspondence, check to make sure it hasn't expired already. It shouldn't last more than three years from the time of refinancing. If it's still on your correspondence and it's been more than three years since you refinanced, contact your lender and ask them to remove it. It shouldn't be there anymore.
Should I refinance my home before selling it?
Whether you should refinance your home before selling it depends on your financial situation and your motives for wanting to refinance.
Refinancing to take advantage of lower interest rates before selling might seem like a good idea if you're waiting for the market to bounce back to get more for your home and you want to take advantage of lower interest rates. Maybe you're thinking about doing some renovations to try to get more for your house when you sell it and are considering a cash-out refinance to fund them.
But look at the bigger picture first. Depending upon how old your original mortgage is, it may not make financial sense to pay the closing costs of a refinance and reset the amount of money that is being allocated to the principal balance each time you make a payment.
When you refinance with a new mortgage, the first few years of your payments primarily go toward interest. So while at first glance, a refinance might seem like a way to save money with a lower interest rate or lower monthly payments, you may end up paying thousands more in interest in the long run. If you stay with the older mortgage, your payments are being allocated more towards the principal which is lowering the total amount you owe in interest.
If you're sure you want to sell your home in the near future and are wondering whether you should refinance, be sure to speak to an expert seller agent in your local market first who can help you decide whether refinancing before a planned sale is in your best interest.
How long should you stay in your house after refinancing?
If your mortgage contract doesn't have an owner-occupancy clause that requires you to live in your house for a certain period of time, you can sell or rent your house whenever you want to. But if you have an owner-occupancy clause that requires you to live in your house for 6-12 months or longer, you could run into trouble at closing if you try to sell your house.
If you rent out your house and you have owner-occupancy restrictions on your mortgage, your mortgage company might accuse you of mortgage fraud if they find out. This is because some mortgages such as FHA loans restrict homeowners from using these loans for investment properties.
You may also be subject to a prepayment penalty. While a prepayment penalty clause in your mortgage contract does not make it illegal to sell your house after refinancing, it could cost you a lot of money.
Finally, you need to consider whether it's a good financial move if you sell too soon after refinancing. Refinancing is expensive. You'll want to make sure you're able to get enough for your house to pay off the mortgage without going underwater — owing the lender more than the house is worth.
Does your lender have owner-occupancy requirements?
A legal obstacle that could prevent you from selling your house just after refinancing or from renting out to tenants is called an owner-occupancy requirement. This requirement can state that the person who signs for the loan has to either live on the property or own the property for a set amount of time after the refinancing.
The average time for an owner-occupancy requirement is about 12 months, but sometimes these requirements are open-ended. It depends on the loan product you purchased. You'll need to read the fine print of your new mortgage note to make sure. If you decide to sell or rent out your home too soon after refinancing, your lender could accuse you of mortgage fraud if they find out.
You are legally clear — should you sell?
After making sure that you're not on the hook for a prepayment penalty fee or an owner-occupancy requirement, the question of whether you should sell after refinancing you depends on whether it makes financial sense.
Before choosing to sell your home after refinancing, it's important to understand the amount of profit you stand to make. If your local market is a seller's market and your house has been appreciating to the extent that you think you can recoup the closing costs of your refinance, then it may make sense to take advantage of local trends and sell the property.
However, if you currently owe more on your house than you can get, it would be wise to wait for a seller's market or until you've paid down the principal so you have enough equity in the house where it makes financial sense to sell.
How does negative equity work?
In order to understand negative equity, you need to first understand home equity. Home equity is the actual market value of your property minus any liens or debts that are attached to the property, such as a mortgage. For example, if you sell your home today for $250,000 and you owe $200,000 on your mortgage, your home equity is the $50,000. But if you owe more on your house than you can sell it for, that amount you're short is considered negative equity.
For example, if you purchased your house for $330,000 and still owe $300,000 on your mortgage but the housing market is in a lull and you can only sell your house for $290,000, you'd owe your lender an additional $10,000 after you sold your house. This is referred to as being underwater or upside down on your mortgage.
Some owners who have negative equity may be able to refinance their mortgage at a lower interest rate or a fixed interest rate to save money. The negative equity is folded into the new mortgage. Using our above example, even though the house is only worth $290,000 the lender may agree to refinance the $300,000 amount owed. This can give a homeowner different terms or a lower interest rate for the life of the loan.
Refinancing to fold in negative equity is possible, but programs that offer this option for homeowners who are currently underwater on their mortgage were designed for homeowners who are not late on their payments and who are seeking ways to stay in their homes, not sell them.
How do you decide if you should sell your house after refinancing?
Deciding whether to sell your house after refinancing depends upon your financial situation. If you've checked to make sure you're not obligated to fulfill any owner-occupancy requirements with your lender and you won't be paying a huge prepayment penalty, you'll then want to make sure it makes financial sense.
If you were able to fold negative equity into your new mortgage and now owe more than your property is worth, you may be better off waiting until you've had a chance to build some equity and at least break even on the sale.
Alternatively, you may find that your local real estate market is experiencing rising house prices and you want to take advantage of getting the most for your house that you can. Whatever your reasons for wanting to sell after a refinance, the best thing you can do for yourself is to get in touch with an top agent in your local market who can give you an accurate picture of what to expect from the market and whether it is a financially smart move to sell after refinancing.
Top FAQs About Selling After Refinancing
How long after you buy a home can you sell it?
If you bought a house with cash, you can sell it any time you want, though there will be tax implications. However, if you financed the house, your lender may have clauses in your mortgage note that require you to live in the house for a certain time before you sell it or rent it out. This can be expressed in your mortgage documents as an owner-occupancy requirement clause. You may also be on the hook for a prepayment penalty if you sell the house too soon after taking out a mortgage to buy it.
Can you sell a house right after buying it?
If you buy a house with cash you can sell it right after buying it, but you will pay taxes. If you took a mortgage out to purchase a house, you may have to live in the house for a certain period before you're able to sell it or rent it out. This is called an owner-occupancy requirement that may be written in your financing contract with your lender. You may also have to pay a prepayment penalty for paying off your mortgage early. Check your loan documents with an experienced realtor if you're unsure whether those requirements apply to you.
Should I refinance if my home value has increased?
There are several scenarios where you may benefit from refinancing if your home value has increased. When you cash-out and refinance, you take out a larger mortgage than your original based upon the increased value of your property and pocket the difference in cash. If you have high-interest debt in the form of credit cards or auto loans, it may make financial sense to do a cash-out refinance and pay them off. Or you may want to renovate or make some improvements on your home that can increase the value of the property even more.
Is it bad to refinance your house multiple times?
It is not necessarily bad to refinance your house multiple times. If used wisely, refinancing is a tool that can get you better interest rates on a mortgage or allow you to shorten the life of your loan to save on interest if you find yourself making more income later and are able to handle higher payments. Or you may want to eliminate some high-interest debt by refinancing. But each time you refinance your house, you'll be on the hook for closing costs that can be 2%-5% of the value of the property, so you'll have to weigh whether you'll still benefit financially after paying closing costs.