Refinancing a home can be an excellent financial move. If you can refinance your mortgage at a lower interest rate, you can save hundreds of dollars each month on your payment. However, refinancing isn't necessarily a good decision if you plan to sell your home in the near future.
Owner Occupancy
It might not be possible to sell a house immediately after refinancing it due to the bank's owner occupancy requirements. There usually isn't a formal rule in mortgage agreements that prohibits sales after a refinance. However, lenders always ask borrowers if they intend to use the house as their "primary residence." It can be deceptive or even fraudulent to check "yes" if you plan to sell the house immediately after refinancing.
If you plan to stay in the house for at least 12 months after refinancing, you'll have no trouble. If you might sell sooner than that, however, you should notify your bank of your intentions just to play it safe.
Costs of Refinancing
Due to the costs of points and other closing fees, most refinancing operations cost between 3 and 6 percent of the loan value, according to Bankrate. If you refinance, say, $150,000 of debt on your current mortgage, you can expect it cost you between $4,500 and $7,500. The high up-front costs of refinancing make the practice illogical if you plan to sell the home soon after the refi, because these costs will cancel out the savings of the lower interest rate.
Calculating the Break-even Point
To figure out if refinancing a home you may sell in the near future is worth the refi costs, you need to calculate the break-even point -- the number of months you need to stay in the home to save enough money on your monthly payment to wash out the cost of the loan. To find this number, simply divide the total cost of the refinance by the monthly savings on your payment. For example, if you refinance a $150,000 loan at a cost of $4,500 and you save $300 per month on your payment, you would divide $4,500 by $300 for a total of 15. That means you'd need to stay in the house at least 15 months to recoup the cost of the loan.
This break-even calculation is a liberal estimate, however. Because of inflation, future money is worth less than present money, and your monthly payments will build equity in your home faster at a lower interest rate. Your actual break-even point would come slightly sooner than the figure in the above example.