Refinancing and selling a home both require careful consideration of your personal and financial needs, as well as the current housing market.
While these options each offer distinct benefits, you’ll need to assess your priorities and decide how important it is to continue living in your home. This article will shed some light on the differences between refinancing and selling a home so you can understand which choice is right for you.
What are your financial goals?
Before you talk to real estate agents or loan officers, it helps to take stock of your personal and financial goals.
Homeowners often have different reasons for considering a refinance or sale. They may require funds, their mortgage payments may prove difficult to manage, or they may be looking to lower other costs associated with homeownership (property taxes, home maintenance costs, or HOA fees).
If you’re looking to reduce the financial pressure from your mortgage or need access to a lump sum, your first thought may be to sell your home. However, a refinance can be an effective solution, too. A regular rate-and-term refinance lets you benefit from lower interest rates and better terms, but a cash-out refinance lets you leverage your home equity for a lump-sum payout.
On the other hand, homeownership can become expensive. You may want to downsize, move, or reduce your estate taxes or HOA fees. In these situations, a refinance won’t help since you’ll keep your home. However, selling provides the opportunity to downsize or move to an area with lower fees or taxes. Selling may also make sense if you have important personal priorities, such as moving closer to family or moving to another city for work.
Assess the housing market
Interest rates can be a significant factor in your decision. When current refinance rates are low, refinancing can be more attractive because it can reduce your monthly payments and total interest paid over the life of the loan. Conversely, when interest rates are high, refinancing may not offer the same benefits, and selling your home might be a better option if you can capitalize on a seller’s market.
You’ll also need to consider the housing market in your location. A home sale can be affected by market conditions like availability of inventory, mortgage rates, demand for homes, and the local economy. When demand is high, sellers can quickly and easily get the price they want. However, in a buyer’s market, sellers may find it hard to get the price they want. A house may remain on the market for months before a sale goes through. Refinancing may make more sense when sellers are stuck in a buyer’s market, as it could make monthly mortgage payments more affordable. However, there’s a risk of closing cost losses if the house sells soon after a refinance.
Refinancing your home
Refinancing is the process of replacing an existing mortgage with a new one. Your lender uses the funds from a new mortgage loan to repay the balance on your old mortgage, after which you’ll make monthly payments on your new mortgage.
There are different refinance options to choose from. A rate-and-term refinance can get you lower monthly payments thanks to lower interest rates or a longer repayment term.
A cash-out refinance lets you secure a mortgage larger than the amount you currently owe on your existing mortgage, based on the equity you have on your home. Lenders pay off your existing mortgage balance and give you the difference as a lump sum to use as you need. While people usually get a cash-out refinance to secure the funds needed for home repairs, you can use the money for debt consolidation, education expenses, car repairs, and more.
Refinancing when interest rates are low may save you some money, but you’ll go through the same application process as with your original mortgage. This includes credit checks, home appraisals, and paying closing costs.
Pros
These are the main benefits of mortgage refinancing:
- Lower interest rate: Refinancing can help you secure a lower interest rate, which reduces your monthly mortgage payments and the overall cost of the loan.
- Debt consolidation: With a cash-out refinance, you can use the equity in your home to consolidate high-interest debt, potentially saving money on interest payments.
- Home improvements: Refinancing can provide funds for repairs or renovations, which can increase the value of your home and enhance your living experience.
Cons
Refinancing has some drawbacks that make it unsuitable for some homeowners:
- Creditworthiness requirements: Refinancing usually requires a good credit score and stable finances, which can vary by lender.
- Loss of equity: Taking out a cash-out refinance can reduce the equity in your home, which could be a disadvantage if home prices decrease.
- Extended debt timeline: Refinancing can extend the timeline for paying off your mortgage, potentially increasing the interest paid over time.
Selling your home
The process of selling your home involves many moving parts. It starts with hiring a real estate agent and working with them to repair or ready your home for sale, set a price, list the house online, review offers from potential buyers, close the sale, and move out. In a seller’s market, high home prices make selling beneficial for homeowners, especially those intending to downsize or sell a vacation/investment property.
Pros
Selling your home offers some advantages worth considering:
- Immediate funds: Selling your home can provide a lump sum, which can be useful for significant expenses or investments.
- Debt reduction: The proceeds from selling your home can be used to pay off existing debts, potentially improving your financial situation.
- Capitalizing on appreciation: If your property has increased in value, selling can allow you to benefit from the appreciation and invest the proceeds elsewhere.
Cons
Here are the potential drawbacks of selling your home:
- Market-dependent value: The value you obtain for your home is heavily dependent on current market conditions, which can be unpredictable.
- Reappraisal required: You may need to have your home reappraised, which can incur additional costs and affect the selling price.
- Uncertain timelines: There is no guarantee on how quickly your home will sell, which can be a drawback if you need funds urgently.
Choosing between refinancing and selling your home
Ultimately, the choice between refinancing and selling your home may come down to the homeowner’s long- and short-term needs. If you want to keep your home but want more affordable monthly payments, a refinance is the likely solution.
On the other hand, if you want to move house after life changes like divorce or securing a new job, selling may make more sense.
The decision requires a careful assessment of your financial situation, market conditions, and your future plans. Consulting with financial advisors and real estate professionals can provide valuable insights and help you make an informed choice.