Your decision to refinance a mortgage can be tricky if you're selling your home. Can this be done? Should you do it, or are other options available? The answers depend on mortgage lender policies, the time frame involved, and your reasons for refinancing.
Refinance a Home You're Selling: Lender Concerns
Mortgage lenders lose money on short-term refinancing. Mortgage lenders face several kinds of risk when they finance real estate. The obvious risk is that the borrower might default. The next-obvious risk is interest rate risk, in which inflation eats up the value of the interest earned. But one risk many don't understand is repayment risk – the cost of a mortgage being repaid early.
Lenders often sell loans to investors based on their expected future income, and if a loan is paid off right away, investors can force lenders to buy the loans back.
Most lenders see refinancing a mortgage when a home is listed for sale as a no-win proposition. If the lender keeps the loan on its own books, the rapid repayment makes the loan unprofitable. If the mortgage has been sold on the secondary mortgage market to investors, the lender is usually required to repurchase the mortgage.
By refinancing a home that's listed for sale, a lender incurs the expense of making the loan and is unlikely to recoup the costs over time.
Why (or Why Not) Refinance When You're Selling?
There are reasons homeowners might wish to refinance a home that's on the market. Here are the most common.
You're doubling up on housing expenses.
If you've already vacated the property and are making rent or mortgage payments at your new location, lowering the interest rate and / or payment for the old home is an understandable goal.
You have doubts about being able to sell the home.
While it may be tempting to refinance a mortgage to reduce monthly payments, reviewing and revising your listing strategy may be a less costly solution. Ask your listing agent to reevaluate home values and market trends in your area every three to six months.
Refinancing a home you're selling may not be worth it.
Refinancing a mortgage on a home that's likely to sell in a few months may not be worthwhile if you choose a loan with the usual closing costs attached (origination fee, title charges, etc.) However, a low- or no-cost refinance might save you money, especially if you exchange a 30-year fixed loan for one with a shorter fixed period – a 3/1 hybrid ARM, for example. You're unlikely to need a rate fixed for 30 years if you plan to sell in the near future.
How to Get a Lender to Refinance You
First, lenders know when you're trying to sell your home because real estate appraisers have to note this when they examine the property. They see it in the local multiple listing service and can hardly miss the existance of a "for sale" sign when they visit your property. But if you've given up on selling your home and want to refinance, there are ways of getting it done. Plan on explaining your reasons for refinancing to your lender.
First, you'll have to take your home off the market. Fannie Mae's guidelines for refinance transactions state that, "The subject property must not be currently listed for sale. It must be taken off the market on or before the disbursement date of the new mortgage loan, and the borrowers must confirm their intent to occupy the subject property (for principal residence transactions)."
If you plan to take cash out when you refinance, you'll probably need to be off the multiple listing service for at least six months. Freddie Mac's guidelines say that properties listed for sale are ineligible for refinance. The property must be taken off the market prior to the loan application date. Cash-out refinancing is limited to 70 percent of the property value if the property was listed for sale within the last 6 months.
Note that if you misrepresent your intention to occupy the property and the loan is repaid quickly, the lender will likely have to repurchase the loan from investors and you can be pursued in civil and criminal courts. In addition, lenders are required to perform quality control audits on closed loans. If your home is sold or immediately re-listed for sale after the refinance closes, you could find yourself in very expensive trouble. As long as you refinance in good faith, however, you may be able to improve your cash flow and save some money by refinancing.
When you're ready to refinance your mortgage, request and compare free mortgage quotes from LendingTree's network of mortgage lenders.