Weekly Rate & Market Update 1-15-16
Question of the week: We are thinking of remodeling our home…
Answer: Okay this is a statement and not a question, but the conversation came up from a client last week and it is one that comes up from time to time. You have owned your home for a while and it is too small, doesn’t have enough bathrooms, another bedroom is needed, etc. You call me and inquire as to how to finance a major remodel; use a cash-out refinance, a home equity line? And my answer:
As part of your remodel process you have a very good idea of what additions, upgrades you wish to make to your home. You may have gotten a preliminary bid or idea of the total cost and now you are investigating where to get the money for the project.
At this point my suggestion is to weigh the costs and benefits of building what you want versus buying what you want.
Are you looking at spending $100,000 to add a third bedroom and a second bath onto your existing home? What is the cost of three bedroom, two bath homes in your neighborhood, is it more cost effective and emotionally effective to sell your current home and buy a three bedroom, two bath home than to remodel your own?
Whatever your intended remodel project is, if it is major some factors you need to consider:
- New financing whether cash-out or an equity line most likely will not be better than purchase money financing for a new home; if you use an equity line are you comfortable with higher rates in the future on the loan
- If you do not have enough equity to borrow enough to cover the construction costs, building in extra funds for cost overruns, then you will need to come up with cash to cover the difference. How does this impact your reserves, retirement accounts, etc?
- Do you like sharing your morning paper and coffee with your contractor and his workers? Most contractors start work very early in the morning and leave in the afternoon. While you are getting ready for work, your kids getting ready for school you will be joined by a crew of workers in your home. How disruptive are you willing to have your daily routine for several months? This can be avoided by moving out during the remodel, but can you afford the costs to store/move your belongings twice plus the rent on another home?
- How does the math work out between financing and paying cash for your remodel versus selling your current home and buying a new one? What is the tolerance you are willing to put into the equation?
- For instance if you are looking at financing $100,000 and it will cover your project the current minimum payment is interest only on a HELOC at say Prime + 0.5% for a rate of 4%. That payment is only $333 per month—but you are not making any payments to knock down the loan. If you amortize it for 20 years the payment is $605 per month.
- Presume you can sell your home for $550,000 and you have a $375,000 loan balance that has a payment of $2100 per month. A new home with the extra bedroom/bath, etc can be purchased for $625,000 in the same neighborhood. Your sell your home and have net proceeds of $130,000; you buy the new home with 20% down ($135,000) and have a new loan of $500,000 with a payment of $2385 per month. Basically new home for less than the cost of remodeling your own home.
These are made up numbers and happen to work out perfectly but you get the idea, it may be possible to purchase the home you want with less headaches, hassles and costs than going through a major remodel of the home you currently have.
Considering a remodel? Give me a call and let’s go through the math to see what would be a comparable price for your situation then you can see if that home is on the market or likely to be in the near future.
Otherwise be ready to share your sports page and Fruit Loops…
Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.
Until today there was little major economic news this week. Today however a trio of major economic reports were released, none of them positive. The Producer Price Index for December was down 0.2% and year over year is down 0.1%; extracting energy and food and the numbers are positive 0.1% and 0.3% respectively; which highlights the impact of dropping oil costs on the broad economy. Dropping and stagnating wholesale prices feeds into consumer prices and with several months of a declining PPI show a lack of inflation that runs counter to the move made by the Fed in dropping rates last month. This report is positive for lower mortgage rates.
December prices not only dropped but so did industrial production. Both production and manufacturing contracted in December for the second straight month. Contracting industrial production is worrisome for employment markets and the economy in general. This news is also positive for lower mortgage rates.
The big news in the trio of reports was the retail sales figures for December. Total retail sales dropped 0.1% and taking out auto sales there was still a 0.1% decline from November. For 2015 retail sales rose 2.1%, the smallest annual gain since 2009, when the recession ended, and significantly lower than 2014’s 3.9% increase. Auto sales drove much of the annual increase, stripping out cars retail sales grew only 0.9% for the year. Contractions in sales of apparel, general merchandise, electronics and appliances occurred in December. The month did see increases in restaurants, not unusual for December, and also home furnishings and furniture, not unusual with increasing home sales. Overall the report shows a consumer not spending a lot during the busiest shopping month of the year, a display of weak confidence that could portend disappointing numbers for 4th quarter GDP. The retail sales news is very positive for lower mortgage rates.
Rates for Friday January 8, 2016: Quite a week for markets. With no major economic news this week, until today, investors made moves based on moving away from equities (stocks) and into the safety of bonds, which includes mortgages, for a several reasons, primarily China and plunge in oil prices. The result has been a drop in stock prices for the week are down about 3% and rates have dropped as well. Investors will be looking for a reason to sell and take profits making rates a bit unstable, but any spike results in still very low rates—in fact a three month low for conforming rates.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.625% Down 0.125%
30 year high-balance conforming 3.875% Down 0.125%
30 year FHA 3.25% *** Flat
30 year FHA high-balance 3.25% *** Down 0.25%
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. ***FHA rates have no points and credit towards closing costs, recent rate change reduces credits
Our second holiday of the year on Monday and it will only be the 18th of the month, at that rate of a work holiday every nine days we should have forty of them this year!
Every year on this Friday before Martin Luther King Day I provide a link to his “I Have A Dream” speech from August 28, 1963. It is truly one of the greatest orations of all time and to see it drives that home. After some hesitancy and seeming to be nervous, Dr. King then hits his rhythm and it is mesmerizing to listen to his words.
Sometime over the next few days block off seventeen minutes and listen to this piece of American, make that world, history.
Have a great week,
Dennis
