What's in this article?
Refinancing and taking advantage of lower interest rates is a no-brainer for homeowners looking to save money in the long-run.
But what about owners who plan to sell — can they refinance before putting their home on the market?
The answer is yes.
It may seem counterintuitive to go through the refinance process when you know you’re hoping to move on from this home soon.
But there’s a few reasons why doing so could even help you in your search for a new home. Lowering your monthly payment now frees up some extra funds to save for the new home.
Different homeowners have different reasons for wanting to refinance just before selling. Let’s take a closer look at refinancing before putting your home on the market.
Why should you refinance?
Two big reasons to refinance a home loan are to lower your interest rate and/or shorten the amount of your loan.
Shortening a loan from 30 years to 15 isn’t going to have much of an effect on a mortgage holder who is looking to move on. It may increase monthly payments.
But there are several other reasons folks should consider refinancing even if they plan on selling.
Lower monthly payments
Finding a better rate and lengthening the time of the loan will lower monthly payments. As we mentioned, that money you save in the meantime can help you save up for your down payment on the next house.
Consolidate high-interest debt
Leveraging equity to consolidate high-interest debt to lower monthly payments can be a benefit to most homeowners, even before selling. Plus, it’s always better to get debts paid down before applying for a new loan.
Go from adjustable rate to fixed rate
If a borrower bought a home with an adjustable rate mortgage and it’s about to reset into a higher rate, they may want to refinance and lock themselves into a fixed rate mortgage.
Make value-adding renovations
Using home equity to make the home more valuable and appealing to buyers can increase the seller’s profits in the long-run.
Some not-so-major renovations that will add value to a home that’s about to go on the market include:
- Garage door replacement — Great for adding curb appeal.
- Attic insulation — Blowing in fiber insulation will not only add value to the home but will cut down on energy costs while you’re still there.
- Minor kitchen upgrades — Remodeling a kitchen can be one of the more expensive home projects, but minor work, like adding backsplashes and refurbishing the cabinets will add value.
- New siding — Not only does new siding add to curb appeal and look fantastic, but it also provides protection to the home’s exterior.
- Home technology — Adding “smart” devices, like web-connected thermostats, water leak detection systems, and security cameras will make a home stand out when selling.
- Finish the basement — Increase a home’s size and selling appeal by finishing the basement. Although money may be better spent upstairs, buyers — particularly ones who work from home and need office space — need as much room as possible.
- New paint — As far as adding value, a fresh coat of paint both inside and outside is hard to beat in terms of getting a return on your investment.
Get Rid of an FHA Loan
Many new buyers have taken advantage of a Federal Housing Loan to get into a home. While good for buyers with not a lot of cash for a downpayment, or those with low credit scores, the mortgage rate is higher than conventional loans.
The rates are higher because borrowers have to pay a monthly insurance premium (MIP) and an upfront mortgage premium of 1.75%, regardless of the amount of the down payment. This payment lasts the lifetime of the loan. Conventional loans do not require this if the borrower puts down 20% or more.
Eliminate private mortgage insurance (PMI)
If borrowers do not put at least 20% down, they have to pay PMI every month. According to Freddie Mac, borrowers generally pay between $30 and $70 in PMI for every $100,000 of loan principal.
Once the mortgage value reaches 80%, it goes away. Refinancing can solve this, but only for homeowners whose home values have increased substantially since moving in.
Homeowners who think they can eliminate PMI should contact a Homefinity representative to get their questions answered.
A cash-out refinance allows the borrower to take their home’s equity and turn it into cash. Good reasons can range from paying for college, consolidating debt, investing, and more personal reasons such as medical debt.
How does it work?
Let’s say your house is worth $200,000 and you have $50,000 left on your mortgage. That means you have $150,000 in home equity. And if you happen to need $30,000 to pay for your daughter’s last two years of college, you can liquidate that money, get a loan for $80,000 — the $50,000 balance and $30,000 in cash.
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Should you refinance before selling?
The biggest reason to refinance a loan is to save money in the long run. But closing costs can rub out the cost savings for those who plan on selling sooner rather than later. It can also take an average of 52 days to refinance a loan.
Every home loan comes with closing costs. Ranging between 2% and 6% of the borrowed amount, these figures will most likely determine whether or not refinancing a home that will soon be placed on the market is worth it.
Homeowners must calculate their “break even” period. This is the time, in months, that will define when cost savings will kick in. This can be calculated by dividing closing costs by the monthly savings from your new payment.
Say a borrower refinances a $250,000 loan at 2%, lowering the monthly payment to $950, saving the borrower $200. The closing costs would be $5,000, so the break-even point is 25 months. As the closing percentages rise, so do the break-even points: 4% means 50 months, 6%, 75 months.
Interests rates have to align in order for refinancing to be beneficial for anyone, but particularly those who plan on moving on.
Some lenders won’t refinance a mortgage if the home is already on the market or they are aware that the borrower plans on selling within a year. Other loans even contain owner–occupancy clauses or stipulations that prevent people from renting or selling their homes in the months after they signed a refinancing loan.
Homefinity can help homeowners
If you’re not sure that you should refinance before selling your home, it’s recommended to talk to a loan specialist about your unique situation.
Regardless of the reasoning for a refinance before selling, Homefinity can help borrowers refinance with the industry’s best rates.
Contact a Homefinity specialist today.
The information contained herein is distributed for educational purposes only.This advertisement does not constitute financial planning advice. Please consult a financial planner regarding your specific situation.Fairway is not affiliated with any government agencies. These materials are not from HUD, or FHA, and were not approved by HUD, FHA, or any other government agency.
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