Maybe you were planning to stay in your home for the long haul, and you realized that you could save some money every month if you refinanced your mortgage to get a lower interest rate. But life has a way of happening and things changed almost as soon as you finished the refinancing process. You might have received word the to-die-for job you applied for is yours for the taking if you relocate, or something else demanded that you pull up stakes.
Can you sell or otherwise vacate your home right after refinancing? It depends.
Depending on your circumstances and the terms of your refinance, it may not be beneficial to leave your home right away. Generally, however, there is no rule that says you can't relocate after refinancing.
Staying After Refinance
No universal rule dictates how long you must stay in your home after refinancing. There’s not a carved-in-granite number of days, weeks or months. The answer depends on your personal circumstances and the terms of your loan.
Are There Prepayment Penalties?
You might be stuck for a while if your loan includes a prepayment penalty, at least if you don’t want to part with a few thousand dollars. As a practical matter, these penalties are becoming obsolete thanks to federal legislation that took effect in 2010. The Dodd-Frank Act now imposes restrictions on them, so lenders aren’t rampantly using them anymore. But even with the legislation in place, a prepayment penalty may still apply to your loan.
A prepayment penalty is a clause that states that it will cost you money out of pocket if you pay off that refinance loan within a prescribed period of time after taking it out. The Dodd-Frank Act confines the time to no more than three years, but you could be prohibited from selling and paying off the loan within that time, at least if you don’t want to cough up as much as 2 percent of the amount you borrowed. This drops to 1 percent by law if you make it into the third year before you sell.
Owner Occupancy Clauses
What if you decide not to sell but just rent the place out? Maybe the reason you want to relocate is something temporary, so you intend to return eventually. Another type of contract clause, an owner occupancy clause, could land you in trouble with the law if you vacate, particularly if a tenant takes your place under the roof.
Go back to all those documents you signed at closing. Did you put your signature to a statement that said you’ll actually occupy the property? These clauses can be limited to one year, or they might be open-ended. In any case, if you move out before you agreed to do so, you could be guilty of mortgage fraud.
It’s important to read the statement you signed, or at least take it to a professional for review. Not all owner occupancy clauses are created equal. Some might require that you continue to own the home but not physically live there. In this case, you might be free to rent the property out.
Selling an Upside-Down Mortgage
There’s also the possibility that you won’t be able to sell the property for enough to pay off your loan, particularly if you do so relatively quickly after refinancing. Your property might be “underwater” – you owe more than it’s worth, at least after figuring in closing costs.
As a practical matter, few if any lenders will offer loans that exceed the fair market value of a property, and appraisals are done to ensure that this doesn’t happen. Lenders want to know that they can get their money back if they have to foreclose and sell the home in the event of default.
But there are closing costs to consider. You could feasibly find that you have to come up with some cash out of pocket to sell your home soon after you’ve refinanced, because the property hasn’t had time to appreciate enough in value to pay off the refinance and take care of extra costs as well.
Calculating Your Break-Even Point
The general rule of thumb for selling after you refinance is something of an equation. Compare how much it cost you to refinance to how much you’ll save each month. If the loan cost you $4,000 in closing costs and it saves you $100 a month on your mortgage payments, you’ll actually lose money if you sell and vacate before 40 months have passed – more than three years.
Divide your closing costs by the amount you’re saving each month to arrive at the length of time it will take before you break even on the whole refinance deal.
Of course, if your reason for relocating is really compelling, these dollars and cents might not matter to you. But otherwise, you might want to stay put long enough to at least recapture your loan costs and make the whole refinance worth your while.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.