Question of the week: What should we do, remodel or sell and buy?
Answer: This is a perennial question that comes up in every market. The answer often depends on the market conditions when it is asked. With the way housing prices have climbed this past year I am getting this question more frequently than in past years, and the answer is a bit different as well.
Typically, this question is because you want to add additional space to your home, perhaps additional bedroom(s) as you family has grown, another bathroom, a family room, a second story. You love your home, your neighbors and the location and you need more space. But what is the best move for your family? Remodel your current home, or sell your home and purchase the home that fits your family’s needs and space requirements?
This year there has been the additional aspect of families looking not necessarily for more common space, but more private space. Many parents have been working from home and their employers are encouraging continued at-home time for work; as a result, adding a home office, or two, is as important as another bedroom or a family room.
Whatever the reason, the question comes down to should we remodel or should we buy the space we need?
There is no simple answer, here are some of the factors you need to consider when making your decision:
What is the value of your home, and what is your current mortgage balance? These are important questions as they will answer how much equity you have to work with to either pay for a remodel, or to purchase a new home (assuming you do not have cash on the sidelines).
What is the estimated cost of your remodel? Back to the question above. Using information from above, how will you pay for your remodel? The most common methods are either refinancing your primary mortgage and pulling cashout, obtaining a Home Equity Line of Credit (HELOC), or both. There are advantages and disadvantages to each method of financing. Each method as a limit as to how much equity you can access.
For a new mortgage, the highest loan-to-value for a cashout mortgage is 80%, some programs limit the amount to 75%. This means if your value is $800,000, the maximum cashout mortgage would be $640,000. If you currently owe $500,000 this would net you about $140,000 less transaction cost.
For a HELOC, some lenders will go up to 90%, but many also limit their maximum loan amount to 80%. In this case the LTV is “CLTV” combined-loan-to-value, where the balance of your primary mortgage is added to the maximum limit for your HELOC and divided by the value of the property. Using the above example of your home value being $800,000; your primary mortgage balance is 62.5% of your value, add in a $140,000 HELOC and the CLTV will be 80%.
Which is the better way to finance our remodel? There are many variables to consider, risk, payment, timing are just a few. Risk comes into play as you likely have a 30-year fixed mortgage on your home now, and if you obtain a cashout refinance will obtain another 30-year fixed mortgage. The least risky financing as you know what your payments will be every month for 30-years, and there is no balloon payment on the loan. The HELOC is riskier for a few reasons, the rate is not fixed, the payments are not fixed, and you may have a period with very high payments or a balloon payment.
There are several advantages of using a HELOC to finance your remodel instead of a new 30-year fixed mortgage. If you have a very low rate on your current mortgage refinancing may increase the rate. Flexibility is a very big advantage of HELOCs. With a 30-year mortgage your funds are paid to you when you close the refinance and you start paying for those funds immediately. With a HELOC you have funds available and only draw funds as you need them, and then only pay for those funds used. If your remodel will not start for several months, and then take several months to be completed, with a HELOC you are not paying for any funds until you pay your contractor, whereas with the new mortgage you may be paying for funds sitting in your bank for months.
Flexible payment options are another advantage of HELOCs since many have a minimum payment of interest only. This enables you to manage cash-flow through your project. As well, if you receive bonuses or large income payments sporadically through the year you can direct those funds to pay down your balance.
In the end which method of financing you decide to use will be the one you feel the most comfortable with that will provide you the funds you need and the long-term difference between stability or some risk.
Note that I covered Should we get a HELOC in the February 12, 2021 WR&MU.
What about a rehabilitation/remodel loan? This is another option to finance a remodel. It is more complicated and some lenders have suspended funding these types of mortgages, however it is a viable option for many families. These types of mortgages require that you have a contractor and a complete bid showing what is being done, time frames and cost. An appraisal is completed that estimates the value of your home after the remodel is completed. This value is used for determining the amount of the mortgage. At funding your current mortgage is paid off and the remaining amount of the loan is “escrowed.” At certain times in the process your contractor will provide you with an invoice, the lender will have someone inspect the property to ensure the work being invoiced is completed, and then send you funds to pay the contractor.
What about buying a new home? Several years ago when the local real estate markets were more stable, most families when they called to inquire about funds to remodel their home I would say, “look to see if what you want is on the market…” Almost all found the home they wanted and were able to sell their current home and move up to the new home.
In today’s market there is a scarcity of inventory and an abundance of buyers. This makes it challenging for those looking to move up to sell their home and buy a new one. As well, because of the higher prices fueled by lower rates, families are finding that while their home is worth more, the home they may by is costing a lot more.
Before discounting buying the home you want instead of remodeling your current home due to market conditions, due the math. What is the total cost difference in terms of mortgage payments, taxes, insurance, and cash to close from your existing equity and/or savings. As well, if you missed the WR&MU of March 12, 2021, I covered how you can get an offer accepted if you currently own your home and need to sell it in order to buy; i.e. a contingency sale.
There is no easy answer to build or buy. If you are considering this question please give me a call and we can work through many scenarios based on your financial situation and the market.
Have a question? Ask me!
Plenty of positive economic news this week, which usually would put more upward pressure on rates, but investors shrugged off the news. While the month-to-month numbers seem negative with personal incomes dropping 7.1% in February, and consumer spending down 1%, the numbers reflect that more people are going back to work at the lower end of the income scale. As mentioned in prior WR&MU, the majority of lost jobs came at entry level positions. As those jobs were lost average personal incomes increased because higher paid employees were still getting paid. Consumer spending dropped in February because it rose significantly in January.
Fed to keep a lid on it. In testimony before Congress Fed Chair Jerome Powell and Treasury Secretary Janet Yellen downplayed any inflation risk due to the trillions of dollars coming out of Washington and reaffirmed their position of keeping rates are near zero levels for at least one-year possible two. This encouraged investors to not look for higher yields in rate markets.
Rates for Friday March 26, 2021: Despite a very large bond auction by the Treasury this week that pushed more inventory on the market, mortgage rates remain flat from last week.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:
30 year conforming 2.875% Flat
30 year high-balance conforming 3.125% 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 with 740 FICO score for purchase mortgages.
Hoo-ray! It is about to be our turn! Us not so old-farts, over 50, are eligible for getting Covid-19 vaccinations in California starting next week. Make sure you are registered on what every database is being used for your location to ensure you are contacted to register for your shots!
Have a great week,
Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog