There are lots of different decisions which you can make throughout your mortgage journey.
These decisions will all impact your ability to do different things in the future. One decision that could impact what you can do going forward is refinancing your home.
Refinancing might seem like a good idea, but depending on your situation going forward, it might not be the best choice.
If you do not plan on staying in your home, then refinancing might impact your ability to sell. Especially if you want to sell soon after refinancing.
This is because of clauses that are found hidden within mortgage contracts. Some of these clauses may prevent you from selling, others might mean you incur a penalty if you repay your mortgage too early.
So if you do plan on selling, it is best to consult with a financial advisor before you refinance. But to help you out, we’ve compiled this guide full of information. So to find out more, keep on reading.
What Is Refinancing?
If you have only ever owned one home, then you might be unfamiliar with the term ‘refinancing’.
A lot of people take out mortgages with the intention of sticking with that mortgage lender until they repay the full amount which they have borrowed.
But, an equal amount of people take out mortgages with no intention of repaying the full amount.
Instead, they plan to take out a new mortgage after a period of time to reduce their repayment balance. This is refinancing.
When you refinance your home, you are essentially trading your old mortgage for a new one. In most cases, this will mean changing the company from which you are borrowing.
When you apply and are accepted for a new mortgage, then your new mortgage lender will pay off your old mortgage.
The balance which they paid off will then become the amount that you have to repay across your monthly mortgage payments. Now that we know what refinancing is, let’s take a look at why you might choose to do this.
Reasons Why you Might Refinance
As we have established, when you refinance your mortgage, you are essentially paying it off to replace it with a new mortgage. But why might you do this? Let’s take a look.
Change The Repayment Term
One of the primary reasons why people choose to refinance their mortgage is to change the repayment term. You will do this for one of two reasons, either to shorten your repayment term, or lengthen your repayment period.
If you have recently had a promotion, then you might refinance for a shorter repayment period as you have extra income and want to take advantage of this to pay off your mortgage quicker.
Likewise, if you want to free up some of your monthly income, then you might refinance for a longer mortgage term to reduce the monthly payments that you have to make.
Change Your Interest Rate
Perhaps the most common reason for refinancing is to change your interest rate. Interest rates are constantly changing, and as they increase, a lot of people choose to refinance so that they can access a lower interest rate, and reduce their monthly payments.
Take Cash Out Of Your Equity
The final reason why many people choose to refinance is to free up cash from their equity.
This is a specific type of refinancing known as cash-out refinance. With this type of refinancing, you accept a larger principle balance, and you take out the difference between the two figures in cash.
A lot of people choose to complete this type of refinancing if they want to complete big house renovations, such as extending or adding a pool.
How Long Should You Stay In Your Home After Refinancing?
So, there are lots of reasons why you might choose to refinance your home. But, if you plan on selling your home, refinancing could end up throwing a spanner in the works.
If you have refinanced recently, and have since made the decision to sell, then you might be wondering how long you have to stay in your home after refinancing, before selling. So, let’s take a look.
Unless your mortgage specifically has a clause that prevents you from selling within a certain time period of refinancing, you can theoretically sell immediately after refinancing.
You will know if you have this clause, as it will be listed as an owner-occupancy clause, and this will usually require you to live in the home for between 6 months and a year before you can sell.
So, if you are refinancing with the intention of selling soon after, ensure that you do not refinance to a mortgage with this clause.
Even if the time listed on the owner-occupancy clause has passed, you might still encounter issues when trying to close on the sale of your home.
So if you intend to sell at any point, it is best to avoid mortgages with this clause. Likewise, you should try to avoid mortgages with a prepayment clause listed. This clause will mean that you have to pay a penalty if you sell too soon after refinancing.
Assuming that you do not have either of these clauses listed in your mortgage, then there is nothing stopping you from selling immediately after refinancing.
There is no law preventing you from doing this. However, it might not be the best decision financially, as you will pay legal fees when refinancing and legal fees when selling your home.
Generally speaking, most people tend to leave it at least 6-12 months between refinancing and selling. Even if they do not have an owner-occupancy clause in their mortgage contract.
But, if you want to sell earlier you can do this, providing that your mortgage does not contain either of the clauses that we listed above.
In short, there is no set amount of time that you should stay in your home between refinancing and selling.
This is assuming that your mortgage contract does not contain an owner-occupancy clause. If it does contain said clause, you will usually have to live in the house for around a year before you will be able to sell it.