Refinancing your home can often make good financial sense – especially if you plan to stay in your home long term. This way, you can save on your mortgage each month and build up your financial portfolio in other areas.
Maybe you’ve recently completed overhauling your mortgage, but then receive an offer for your dream job on the other side of the country, or your parent is ill and needs you close by.
So now what? How long after refinancing can you sell your house?
How Long After Refinancing Can You Sell Your House?
Here are the things you need to consider before knowing if you will be able to sell:
Does Your Mortgage Have a Prepayment Penalty?
Luckily, since the government passed the Dodd-Frank Act (fully known as the Dodd-Frank Wall Street Reform and Consumer Protection Act) in 2010, prepayment penalties are typically a thing of the past.
However, some lenders still use them, so it’s important to know if you agreed to one on your new mortgage before you try to sell your home after refinancing.
A prepayment penalty clause is essentially a fee your lender charges you if you pay your loan off early. While you might think it makes sense for the lender to receive the principal of sooner, it actually means a financial loss for them. This is because if you pay your mortgage off in a shorter amount of time, the lender will receive less interest.
Since the Dodd-Frank Act, if there is a loan that even has a prepayment penalty attached to it, the maximum penalty period is three years. This means that you will not be allowed to sell your home for at least 3 years after you refinance your mortgage, unless you are willing and able to pay the fee.
However, the Dodd-Frank Act also states that the prepayment penalty cannot be more than 2% of the total amount of the loan during the first two years after refinancing it. This drops to 1% of the total during the third and final year of the clause.
A Prepayment Penalty in Action
Depending on your financial situation, it might make sense to just bite the bullet and pay the penalty; however, if you have any flexibility in your moving timeline, here’s how it would work:
If your mortgage is worth $150,000 and you just refinanced it within the last three months, you would pay a $3,000 penalty if you moved today. You would pay a fine of $1,500 if you waited until you had the loan for over two years. If you waited the full three years before deciding that you wanted to, you would pay no fee at all.
Again, depending on the urgency of your move, it could be worth it to pay the penalty fee, but following the timeline laid out in your original contract can also save you a pretty penny.
How Do You Know if You Have a Prepayment Penalty?
It is very easy to find out if your refinanced mortgage comes with a prepayment penalty. You don’t even need to make a phone call to do so. By law, your lender should have disclosed the fee on all of the following documents:
- Your monthly bill
- Your mortgage coupon book, if you have one
- Any other communication from the lender about your loan, including information about payments and interest rates
Your Deed or Mortgage Note should also clearly disclose the fee if there is one in your contract.
Does Your Lender Have Owner Occupancy Requirements?
Another legal obstacle that could prevent you from selling your house just after refinancing is something called “owner occupancy requirements.”
As you can tell from their name, these requirements require the person who signs for the loan to live on the property (or at least own it!) for a set amount of time after the refinancing.
Because of this, you could get into real legal trouble if you decide to sell your home too soon after refinancing, as some lenders could consider your actions to be mortgage fraud.
Make sure you really read the fine print of your new mortgage agreement, so you can move fast, if the situation requires.
The average length of time for an owner occupancy requirement is about 12 months.
You Are Legally Clear – Should You Sell?
After making sure that you are not on the hook for a prepayment penalty fee or an owner occupancy requirement, the question of how long after refinancing can you sell your house becomes one of pure financial sense.
Much like when you originally closed on your home, there are still “closing costs” associated with refinancing a mortgage.
For example, you will have to pay for a Title Search to ensure there is no claim of ownership from anyone else on your property. You will also have to pay a Mortgage Application fee, so your lender can check your credit and process your loan. Lastly, you will need to pay a Loan Origination Fee, which you will use for the underwriting and funding of your new loan.
Before choosing to sell your home after refinancing, it’s important to understand the amount of profit you stand to make. Sometimes the local market is such that these closing costs or potential penalties can easily be recouped from the sale of the home.
If this is the case – sell!
One Last Thing: Negative Equity
Negative Equity is when you currently owe more on the mortgage of your home then your home would sell for on the current market. If you have refinanced your home to try and escape negative equity, selling soon after is usually a poor choice that would result in more financial stress and uncertainty.