Do You Sell Your Home or Refinance Your Mortgage This Year?
As we close in on the start of the fourth quarter of 2023, it would be an understatement to say that the housing market has been a bit of a disappointment once again this year. Not helping things is the fact that the Fed recently raised interest rates to over 7%, putting it a far cry away from the hopeful 5% that most industry analysts were predicting at this time last year.
The recent rate hike not only affects the hopes and dreams of new buyers, but it also puts a lot of added strain on those who haven’t yet made the decision to either sell their homes or refinance their mortgages. With such uncertainty looming, what’s the best bet for 2023 – should you sell or refinance?
Top Factors to Keep in Mind
Whether you sell or refinance, there’s one thing that you need to have if you want your transaction to be successful and that’s home equity. If you don’t have much equity in your home, then you will probably want to hold off on doing anything because the value simply won’t be there. That said, people sell their homes all the time and for a variety of reasons, so depending on your situation, your need to sell may be more important to you than maximizing your profit.
Traditionally, refinancing usually only makes sense if you can secure an interest rate that’s at least 1% lower than what you’re currently paying and you are planning on staying in the home for at least five more years. On average it takes about five years to recoup the money that you spend on your closing costs, so if you sell before you reach your break even point, then you will ultimately wind up losing money on your transaction.
Another thing you need to do is think carefully about what goal you are trying to achieve because your goal will ultimately tell you whether you should sell or refinance.
When Refinancing Makes Sense
Refinancing makes the most sense for those who really want to stay in their homes and attain a certain financial goal. Some of the most common goals for refinancing can include:
- You’re looking to reduce your monthly mortgage payment. This will extend the repayment term on your loan and result in you paying more towards the interest over time, but it will make it easier on your wallet month-to-month.
- You’re willing to pay a little more per month to pay off your mortgage more quickly. Refinancing from a 30-year loan to a 15-year loan will result in a higher monthly payment (despite a lower interest rate), but you will own your home outright in half the time.
- You want to change your loan type. If you’re nearing the adjustment point on your adjustable-rate loan, then you may want to refinance into a fixed rate loan to avoid a sudden sizable increase in your loan payment.
- You want to access your home equity. A cash-out refinance will allow you to borrow against the equity in your home, so it can be used for home improvements, college tuition, or another major expense. Depending on how you use the funds, this can be a smart investment.
When It Makes Sense to Sell Your Home
If you no longer want to live in your home or you need to move, then selling will always make more sense over refinancing. But of course, the more equity you have in your home, the better your options will be. For instance, if you want to move closer to work, or to your family or friends, and you have $400,000 equity in your current home, then selling it will give you the freedom to buy a new home for $300,000 in the area you want to live in and still have a lot of money left over.
Selling your home when you have a lot of equity can provide you with cash with no strings attached. You get to pocket whatever is left after paying off your current mortgage, including the costs and taxes associated with selling.
Conclusion: To Sell, or Refinance?
The recent interest rate hike is going to knock a lot of homeowners out of the refinance market, but if you’re one of the few who can still benefit, then you might want to take action before the rates rise any higher.
Before you sell your home to buy a new one or refinance, talk to your local mortgage professional. After all, regardless of which path you take you will want to make sure you can qualify for a new mortgage with favorable terms. At the end of the day, f you can’t get a new loan with good terms, then you might want to hold off on refinancing or selling your home.
