How Long Should You Stay in Your Home After Refinancing?

If you’ve recently refinanced, there are a number of factors to consider before deciding on the right time to sell your home. The terms of your loan, your current interest rate compared to the real estate market, and your financial goals can all impact whether moving is the right choice, since selling too soon can result in a financial loss.

At the same time, life is unpredictable, and there are times when you may have to consider selling, even if you’ve recently refinanced. If this predicament sounds familiar, this article can help you make the financial decision that feels right to you.

How Long Should You Stay in Your Home After Refinancing to Break Even?

That depends. Just like when you took out your original mortgage, you'll have to pay closing costs when taking out a new loan. Refinance costs can eat into your savings or impact your monthly payments if you roll them into your loan amount — but that may be worth it if you plan on staying in the home for a while. If you plan on staying in your home for the short term, the cost of refinancing may not be worth it.

Closing costs typically range from 1% to 6% of the loan amount, but can vary depending on the lender, mortgage type, and home value. Refinancing costs may include:

• Loan application fee
• Loan origination fee
• Appraisal fee
• Title insurance fees

Some borrowers choose to pay refinance closing costs upfront, while others choose to roll them into the new mortgage, which can impact your monthly payment and also the potential for monthly savings. Lenders may offer to pay your closing costs upfront — referred to as a credit — if you agree to a higher interest rate, effectively trading immediate savings for higher monthly payments.

What is a Break-Even Point in Refinancing?

Your break-even point is the number of months it will take to recoup your costs and can help you decide if now is the right time to refinance. You can calculate your break-even point by dividing your total refinancing expenses by how much you expect to save on your new mortgage payment.

Let's take a look at the below example for a 30-year, fixed-rate mortgage:

• Refinance amount: $200,000
• Closing costs: $6,000 (or 3% of your loan amount)
• Original interest rate and monthly mortgage payment: 7.00%; $1,331
• New interest rate and monthly mortgage payment: 6.30%; $1,238

In this situation, you will save $93 a month by refinancing. That puts your break-even point at about 65 months — or just over five years.

Of course, any number of factors can impact your monthly payment amount, including the mortgage terms of your loan modification and whether you took out a cash-out refinance loan vs. a rate-and-term loan.

How Long Should I Wait to Move After Refinancing?

It’s important to consider the repercussions of moving too soon after refinancing, such as whether you have negative equity from taking out a cash-out refinance loan or have recovered your closing costs from the new mortgage loan. There may also be prepayment penalties from the mortgage lender if you decide to sell too soon.

However, if you’ve heavily invested in home improvements and are trying to take advantage of a booming real estate market, or the value of your home has skyrocketed, you may find yourself in a position to evaluate the benefits of selling.

What Happens If You Sell Too Soon After Refinancing?

Refinancing comes with upfront costs that take time to recoup. Selling too soon means you may not break even on those expenses. Depending on your loan terms, you may also owe more than your original loan balance or face prepayment penalties.

Let’s further explore four drawbacks of selling too soon after a refi:

1. Unrecovered Closing Costs

Moving too soon after refinancing means that you may not have time to recover your closing costs. For example, if your break-even point is five years but you sell your home after two, that will probably translate into a financial loss.

2. Lost or Negative Equity

A cash-out refinance requires trading a portion of your home equity for a lump sum of cash. You'll regain that equity with every mortgage payment you make. But if your equity hasn't bounced back by the time you move, you'll keep less of the net proceeds from the home sale. If the size of your new loan exceeds the home’s selling price, you could end up in a situation where you still owe money to the bank after the sale.

3. Credit Health

Frequent refinancing or selling can affect your credit health. That's because each new mortgage application will result in a hard credit inquiry that temporarily reduces your credit score. New mortgage loans will also appear on your credit report. And don't forget that refinancing resets your loan term, which is typically 30 or 15 years. That could stretch out how long it takes to pay off your mortgage.

4. Prepayment Penalties

Certain types of loans include penalties for paying off your mortgage loan early. These fees are designed to help compensate the lender for lost interest, since they won’t be collecting for the full life of the loan.

When Should You Sell After Refinancing?

There may be some situations where you're better off selling your home, even if you've recently refinanced. That may include:

• Unforeseen life changes: Sometimes, life happens. Divorce, job relocation or needing to move for personal reasons are reasons you may consider selling soon after refinancing.
• Significant housing market appreciation: In this case, your house might fetch a much higher price than you originally expected — allowing you to break even on your refinancing costs. Just keep in mind that buying a new home may be more expensive due to increases in market values.

What are Alternatives to Refinancing if You Plan To Move Soon?

If you decide that refinancing doesn't make sense because you don't see yourself staying in your home long term, you may consider an alternative like a home equity loan that doesn’t have the same steep closing costs. However, some options may have higher interest rates.

Consider the below 3 options compared to your standard refinance options:

1. Home Equity Line of Credit (HELOC)

Like a cash-out refinance loan, a home equity line of credit allows you to borrow against your home equity. But instead of receiving an upfront cash payout, you'll have access to a credit line that you can use on an as-needed basis during the draw period. That offers a flexible financing option, and you'll only pay interest on the amount borrowed.

2. Home Equity Loan

This option also allows you to tap into your home equity, but it doesn't involve restructuring your mortgage. Instead, you'll have a second loan that exists alongside your original home loan. As a result, your mortgage payment and interest rate will not be affected. Unlike a HELOC, the borrower receives a lump sum of cash.

3. Personal Loan

If you need cash quickly and don't have an emergency fund or home equity to draw on, a personal loan is another option. This is an unsecured loan that has nothing to do with your mortgage. These often come with fixed interest rates and monthly payments. The downside is that rates can be high — sometimes exceeding 35%. But you might secure a lower rate with lower payment amounts if you have strong credit and steady income.

The Bottom Line

If you're planning a mortgage refinance anytime soon, you'll want to consider how long you plan on staying in your home. Selling too quickly after refinancing could result in financial losses. But if you plan on living there for the long term, that could give you time to recoup your costs and save on overall interest.

Every homeowner is different, and your personal financial situation will be unique to you. A mortgage professional can provide tailored advice that's designed for your individual needs.

Frequently Asked Questions

Can I sell my house immediately after refinancing?

There’s no legal restriction preventing you from selling a primary residence right after refinancing. However, you'll likely face financial losses if you haven't reached your break-even point, you have negative equity in your home, or (although not common) if your loan includes prepayment penalties.

Do all refinanced loans have prepayment penalties?

Most loans do not have a prepayment penalty, but check your loan agreement or ask your lender about payoff fees before refinancing.

How does a cash-out refinance affect my ability to sell?

A cash-out refinance reduces your home equity, which means you'll have less profit when you sell. If you took out more than you owe on your loan, you could end up owing money after the sale.