Home > Mortgages > Should You Refinance Even If You Plan to Sell Your Home?

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Are you interested in refinancing your mortgage, but hesitant to do so because you’re thinking of selling your home at some point? Believe it or not, refinancing could still make sense. Here are several reasons why you might want to consider refinancing anyway.

Your Financial Circumstances Could Change

Let’s say you plan to sell your house in five to seven years. No matter how well you plan for the future financially, things happen. Job loss, illness, death — life inevitably gets in the way of your financial plans. Focus on the here and now, as long as you can financially justify refinancing your mortgage. The longer the horizon of selling the home, the more chances life has of getting in the way. If refinancing can save you money in the meantime, it may just make sense.

Because financial circumstances can change over time, for better or worse, it can be a good idea to calculate how affordable your house really is for you. This free calculator can tell you how much house you can afford.

You Could Take Advantage of Lower Interest Rates

At publishing time, 30-year mortgage rates have edged their way up and are hovering just over 4%. The new outlook for mortgage rates points to continual increases, bringing the cost of debt up. Picture this, if you don’t sell the property or if there is a market correction — and you do not refinance for whatever reason — is your current loan rate and payment something that you can afford to carry for the long haul? If you could save money or better your financial position, it is probably worth investigating. Rates are even better on jumbo mortgage loans, as more investors are pouring into this particular market niche. So if you have a big mortgage on your home, you may want to consider refinancing.

You’re Facing a Higher Rate on Your ARM or HELOC

With the increased likelihood of interest rates going up in fall 2015, the subsequent recasting of adjustable rate mortgages and home equity lines of credit will affect millions of homeowners. Most adjustable mortgage loans were tied to the London Interbank Offered Rate, which closely trails the Fed Funds Rate, the rate at which the Federal Reserve uses to control the U.S. economy. If the Federal Reserve hikes interest rates, LIBOR will soon follow suit, and any homeowners within their adjustment period will experience a higher payment or a future higher payment when their adjustable-rate loans reset.

A home equity line of credit (HELOC) works in a similar fashion to an ARM with a fixed period for the interest rate, followed by a rate reset. For a HELOC, payments are interest-only for the first 10 years of the 30-year term. After 10 years, the loan resets, and for the remaining 20 years the loan payment is principal and interest, so at the end of 30 years, the loan is paid off in full. The payment shock will happen after the first 10 years is up.

If you have a first mortgage on your home with a HELOC, it very well might make sense even if you plan to sell the home down the road, to roll the first mortgage and HELOC into one, saving money and continuing to make a manageable mortgage payment until you sell.

Mortgage Tip: If you have not taken any draws on the HELOC in the past 12 months, you may eligible for more mortgage programs as the HELOC may be considered to be what’s called “rate and term,” which allows you to refinance up to 80% of the value of the home.

You Want to Rid Yourself of This Dreaded Mortgage Cost

The one mortgage cost consumers love to hate is private mortgage insurance. PMI is an extra portion of the mortgage payment that not only drives the housing expense higher, but doesn’t do anything beneficial for the consumer. PMI benefits the bank to protect against payment default. If you can rid yourself of PMI because you have 20% or more equity in your home, or can qualify for a special mortgage loan program such as lender-paid mortgage insurance, you’ll save money. PMI can average up to several hundred dollars per month in most instances. If you have the 20% equity needed to refinance a new non-PMI loan and are credit-worthy, but simply choose to not refinance because the paperwork is too daunting, you’re throwing money away.

If you’re not sure where your credit stands, but you do want to refinance, it’s a good idea to check your credit sooner rather than later. You can get two of your credit scores for free on Credit.com, and they’re updated monthly so you can watch for changes.

How Quickly Will You Begin Saving Money?

No one should refinance unless the time frame it takes to recapture the closing costs on a refinance is sooner than the time in which they plan to sell the home. The most common form of determining how quickly you can recoup your money when refinancing is performing a “cash-on-cash” calculation. For example, if your closing costs are $2,800, and you’re saving a proposed $300 per month on a refinance, that’s a nine-month recapture. Fees divided by benefit equals recapture.

If you can benefit by refinancing by payment reduction, by cashing in on equity, or by interest savings or any combination of these benefits, remortgaging your home very well could make sense. Consider the following scenario: If you can recapture the costs of the refinance in under two years, and you don’t plan to sell for five years, you’re three years ahead, and the rewards are yours, no matter what the future holds. Ultimately, weighing out the pros and cons of a possible refinance in conjunction with selling the home is a decision for you to make. A good mortgage professional should be able to suggest mortgage options in alignment with your financial goals and objectives, which can help you make the most prudent decision.

More on Mortgages & Homebuying:

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  • Gay Ray

    I have some questions about refinancing

    • http://www.credit.com/ Credit.com Credit Experts

      What are they?

  • http://www.Credit.com/ Gerri Detweiler

    Before you do this, I would suggest you do one thing. Talk with a reputable credit counseling agency. They can help you put together a plan that may or may not involve using your home equity to pay off those credit cards. Does that sound like a good next step?

  • http://www.Credit.com/ Gerri Detweiler

    Ah – I got it. Without knowing your detailed financial situation it sounds like a reasonable plan. Nevertheless, since you are nearing retirement it wouldn’t hurt for you to get an objective opinion either from a credit counseling agency or financial planner. They may have some suggestions you hadn’t thought of.

    • Gay Ray

      Thanks.

      • ScottSheldonLoans

        I agree if you can reduce your fixed costs to the tune of $400 per month and funnel that into prepaying your credit cards, that could be a good approach. Alternatively given your age, you might want to see what what it would look like if you added the credit card balances to the mortgage to see what the monthly savings would be that way that way you’ve got another option–, possibly more wiggle room for “seeing” more of your income.

  • heavyw8t

    I am really confused about one aspect of refinancing. I know FIVE people who say they were able to refinance under either HARP or HAMP. When I investigate that, the first question on the page is “Is your loan through Fannie Mae or Freddie Mac?” For me that answer is “No”, so I am immediately disqualified. NONE of those 5 people have their loan through Fannie Mae or Freddie Mac. How were they able to refinance under HARP or HAMP? I talked to one just yesterday and he said “I just filled out an application and they refinanced me.” That one verified his mortgage is NOT Fannie Mae. What about those of us who did not have to go the Fannie Mae or Freddie Mac route? Are we just out of luck and can’t take advantage of these programs?

    • ScottSheldonCaliforniaLender

      Harp 2is for homeowners whose loans are owned by Fannie Mae or Freddie Mac and whose loans were taken out May 31, 2009 or before. HAMP- home affordable mortgage program IS A GOVERNMENT-SPONSORED program to help people refinance or otherwise have credit or financial challenges. The difference here is that your loan does not have to be specifically owned by Fannie Mae or Freddie Mac for Hamp.

      • heavyw8t

        This is directly from the HAMP web page.

        What is HAMP?

        HAMP is designed specifically to help homeowners impacted by financial hardship. With HAMP, your loan is modified to make your monthly mortgage payment no more than 31% of your gross (pre-tax) monthly income. If eligible, the modification permanently changes the original terms of your mortgage.

        A modification may be an option if:

        You are ineligible to refinance

        You are facing a long-term hardship

        You are behind on your mortgage payments or likely to fall behind soon

        Your loan was originated on or before January 1, 2009 (i.e., the date you closed your loan)

        Your loan is owned by Fannie Mae or Freddie Mac –or is serviced by a participating mortgage company.

        Also there is that time requirement, in the second to last line. My loan was effective Jan 26, 2009. It seems rather prejudicial that the government would help some citizens and not everyone.

        • ScottSheldonCaliforniaLender

          You are 100% correct. It is absolutely prejudicial. That’s the federal government. Be that as it may, HAMP is specifically designed for someone who has some sort of the financial hardship and the ability to make their mortgage payment is jeopardized. What are your circumstances? What is your financial picture look like? Guidelines are starting to loosen and you might give the qualify now anyway under traditional mortgage type. Where are you looking for a loan in, like what state? Feel free to contact me and I’d be happy to point you in the right direction if I can’t personally help. Thank you for posting these questions.

          • heavyw8t

            I am not in any kind of financial distress. I would like to find a substantial refinance option (Note, substantial – not $35-45 a month savings. Substantial to me is $100-125.) I would then continue to make the same payments as I make now so that excess would go to principle. I have never missed a payment in almost 7 years of my mortgage and being on a fixed income makes me more secure than ever because that fixed income is for life. That means I also WON’T suddenly become financially distressed to where my mortgage goes into jeopardy. I just want to pay less interest. I looked at a refi early this year and the up front costs would have been so high that at a savings of $50 a month it would be 2 years until I recovered those up front costs. Not really a bargain for someone looking for savings NOW.

  • dejah thoris

    What are reasonable closing costs for a refi of a 200k house? Some places are charging 6 to 8k.

  • D Robb

    I have a refi question. I am currently in a home where have 95k equity (350, owe 255). I plan to sell in the next 12 months but am trying to buy another home in another state now. I would rent that home out once purchased for the 12 months, sell my home and move into that home. I could wait, sell then buy but I will miss this specific home likely. Can I refi cash out my VA loan now to get down to buy the other house and is that a terrible action? What other avenues can I take?

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