Dennis' Mortgage Blog

Weekly Rate & Market Update 5-5-17
May 5th, 2017 2:03 PM

Question of the week: We are thinking about putting in a pool, how can we finance and what will be the impact on our home’s value?

Answer: The answer to this question is somewhat similar to the answer I give when someone contacts me to discuss a major remodel or addition to their home: before you build explore the options of buy. In other words before you commit to tearing apart your home to add another bedroom, or your yard to add a pool, see what is on the market that would replicate what your end result will be and if it makes sense and you can qualify to purchase the end result instead of build it at your current home.

Like anything else, there are two ways to pay for a pool installation: pay cash or borrow the money. How you finance the installation depends on several factors, primarily how much equity you currently have in your home.

In order to pull equity out of your home to finance your new pool you have to have equity in your home to pull out. Depending on how much equity you have will determine the options for financing the operation.

There are two basic options, and they can be blended, when obtaining equity from your home, be it for building a pool, paying for kids’ college or leveraging a second home or investment property. First is a traditional refinance in which we refinance your current mortgage and increase the balance on the new mortgage to obtain the funds needed for your pool endeavor. The amount of equity you can access depends on the loan program, however in most instances we can go up to 80% of the current value of your home (i.e. without the pool installed); if your home is worth $750,000 we can do a cash-out refinance to $600,000.

The second option is with a second mortgage, or most commonly used a Home Equity Line of Credit (HELOC). The total loan to value available will vary depending on the lender and your ability to qualify, many will go to 85% loan to value and some to 90% loan to value.

Let’s use a $750,000 home that has a current balance of $550,000. You have met with a pool contractor and after the design has been agreed upon the total cost of the installation and all amenities will be $80,000. We have two options: use a HELOC for the entire $80,000 or refinance your existing mortgage to 80% loan to value, which will provide you $50,000, and then obtain a HELOC for the remaining $30,000. When the dust settles, or rather the loans have funded you, you will have $630,000 in loans against your $750,000 home for a total loan to value of 84% loan to value.

One advantage of the HELOC is you do not pay for all the money as soon as it funds but can use the equity line as you need cash, or you can use it as a “backstop” using cash you have saved and if you have an emergency or need cash in the future you can use the equity line.

The key to being able to finance a pool installation, or home construction, is the current value of your home and what you currently owe.

Regarding the second part of the question, what is the impact of a new pool on the value of your home, if you are going to install a pool at your home is that there is a very low return on investment—in fact it might be the lowest return for any feature you can add or improve on your property. Speaking from experience, and we did not install a new pool but extensively remodeled the pool in our home when we bought it that was at the end of its life, when you install a pool you are not just having someone dig a hole, line it and then fill it with water. You will also have plumbing, electrical, hardscape and landscape, and perhaps amenities such as entertainment area with grill, media, a spa, changing/shower room, etc. In the end your home will be transformed, as will your lifestyle at home, but not without considerable cost.

For the average home the market value of a pool is from about $15,000 to $25,000, against costs that can run from around $35,000 to $100,000 or more depending on your amenities, design etc. Regardless if you have the $35,000 pool installed or go full blown luxury hotel/spa backyard, the return is very low. If you are considering adding a pool to add value I strongly suggest you buy a home with a pool instead of trying to make money installing one in your yard.

If you wish to discuss options or go through what-ifs of putting a pool in your yard, or any other home remodel/improvement project that may need financing please give me a call, I’m happy to go through the various options.

Have a question? Ask me!

It is the first week of the month, which means jobs information. The week started with how much we make and what we do with it. Monday the Bureau of Economic Analysis released Personal Income and Consumer Spending data for the month of March, and the numbers were not celebrated. Personal income for the month rose an anemic 0.2% in April, following several months of good growth for incomes. While personal income was anemic consumer spending was flat-lined in April showing 0.0% growth (for those who didn’t pay attention when percentages were covered in math class, that is zero growth) from March’s spending—which was revised to also show no increase in spending. That would be two consecutive months with consumers earning more but not spending more. The result is a little positive as it means savings rate increased 0.2% to 5.9% savings from personal income. This new is positive for mortgage rates, meaning no upward pressure and perhaps a bit of downward pressure, on rates.

The third part of the report, the PCE price index (Personal Consumption Expenditures) was the opposite of positive. Whenever there is data for prices there are two components, the index and the “core” index. The index is everything consumers buy, food, clothing, energy, movie tickets, whiskey (a perfect gift for dedicated mortgage professionals in Long Beach), the “core” index takes out food and energy prices which tend to be volatile. In April the full index dropped 0.2% and the core index dropped 0.1% for the month. The drop in the core index presents the weakest prices in almost sixteen and a half years. Overall the news is not good and combined with other economic data presents a very weak first quarter for the economy—which is positive for lower mortgage rates.

On a much more positive note the Labor Department’s jobs report for April showed a strong gain of 211,000 jobs for the month, and a drop in the unemployment rate from 4.5% to 4.4% which is the lowest reading since May 2001. Adding to tightness in the labor market was the pool of eligible workers dropping 200,000 workers. More people are working, income is rising, albeit slowing in March, but the paychecks are not being converted to spending which is troublesome looking forward since consumer spending is 60-65% of our economic activity. Today’s Labor Department report supports higher rates, however it is more than dampened by the lack of consumer spending.

Rates for Friday May 5, 2017: Rates remain stable this Friday from last, and the week before and the week before, with not enough news to create momentum up or down for rates. The one thing our industry will never complain about is stable rates.

30 year conforming                                       3.875%               Flat
30 year high-balance conforming                 4.00%                 Flat
30 year FHA                                                 3.25%                 Flat
30 year FHA high-balance                           3.75%                 Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages.

This section of the Weekly Rate & Market Update is generally where I put in some personal information, this week I am going to brag about the Long Beach Unified School District. Recognized for many years as one of, if not the, best “urban” school district in America, this week and next shows one way this recognition is valid. Monday morning and yesterday afternoon I helped proctor for AP exams (advance placement college-level exams that many colleges will give class credit if certain scores are met). One matrix for measuring the quality of education being provided students is college readiness of graduates, and the biggest factor in college readiness is the availability of AP exams. This week and next well over 13,000 students across the district will take AP exams in almost 30 different subjects. What’s more is these exams cost about $100 per exam, so a student taking four APs can face a pretty hefty bill. However Long Beach Unified covers almost all the cost of the exams, a student pays a fee of $15 when registering for the exam and after completing the exam is refunded $10 so the total cost is only $5. By removing this cost barrier for many students in the district LBUSD has seen a tremendous jump in the number of students taking these exams and also taking AP classes—meaning more students are exposed to rigorous academic environments similar to what they will face in college.

Families in Long Beach are fortunate to have an excellent school district that not only prepares kids for college but because of the College Promise guarantees spots through four years of college for graduates in partnership with Long Beach City College and Cal State Long Beach. While there are other excellent schools and districts in California, some may meet but none exceed the quality of education our daughters are receiving. I am proud of our district and their continued commitment to quality education.

Good luck to those students with exams still to go!

Have a great week,


Posted in:General
Posted by Dennis C. Smith on May 5th, 2017 2:03 PMPost a Comment

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