When’s the time to refinance? Play it safe, experts say
Tony avelar
USA Today
Passerby John Malone reads about one of many homes for sale on a San Jose, Calif., street
USA TODAY last week invited readers who are thinking of buying, selling, or refinancing a home to send in their questions. Here are selected questions, answered by real estate experts.
Q: My 5-year, interest-only loan (which is fixed for the five years then becomes adjustable) will reset in October to 6.65% from 4.65%. Should I refinance now and play it safe or wait a few months due to current economic trends indicating that we may be or are moving toward a recession? Does a recession usually mean the Federal Reserve will cut rates and then mortgage rates will follow?
A: I’d suggest you take your own advice and do the safe thing, says Marc Savitt, president of the National Association of Mortgage Brokers. Current interest rates are about 6% for a 30-year, fixed-rate mortgage, and much lower than your reset rate of 6.65%.While some economists predict a recession in the coming months, this doesn’t necessarily mean rates will drop substantially, if one occurs. Inflation is also a determining factor in the Fed’s decision. You should also keep in mind long term rates sometimes increase when the Fed cuts. Waiting might also mean a further drop in your home’s value, which could make a refinance more expensive, or completely prohibitive.
Q: I moved to Cincinnati 6 months ago and have been more confused than ever about the home-buying process in a market that I am unfamiliar with. In the current market, is it more advantageous to buy a new home or an older home? And what is the lowest respectable offer that should be made (generally) — 8%-10% off of the asking price?
A: Given a choice, and all things being equal, most everyone prefers to buy a new home vs. an older home, says Karen Schlosser, president of the Cincinnati Area Board of Realtors. Buying new allows the individual to personalize their home before moving in. Having said that, not all communities offer a lot of new construction therefore buying an existing home that has been made “new” (i.e. new kitchen and baths, updated lighting fixtures, new carpeting, refinished hardwood floors, etc.) is the ticket.
Buyers today go for low to no “hassle” when buying; something they can move in with little to no cash infusion except perhaps for some painting to make it their own. Your best bet is to buy a home in pristine condition and keep it that way so when you go to sell you will reap the benefits.
When making an offer, it is difficult to use a rule of thumb of taking off a specific percentage of the list price because properties are not always priced appropriately. If you choose that route and the property is overpriced, you risk overpaying. You would be best to work with a real estate agent who will provide you a pricing analysis of the home you are interested in buying so you make an offer you can live with.
Q: The thing that concerns me most is whether I should buy or sell first? We have looked at some homes (in Montana) that interest us, but what happens if we put our home on the market and it just sits? Our house is worth about $200,000 and those we like are going for about $325,000. Are there contingencies which don’t cost a lot of money if things don’t work out? And does this slow market help or hurt me?
A: The slow market hurts you, but if you’re selling a house for about $200,000, that is a good range for first-time buyers, says Dan Wagner, president of the Montana Association of Realtors. Homes in Montana in that price range are selling well. I don’t know why that house would sit on the market for very long.
If you are going to buy in the $300,000 range, those homes are harder to sell, so that’s going to make a transition from $200,000 to $300,000 pretty easy.
You can put a contingency in the contract to ensure you sell your home you’re sitting in before you purchase the other.
Q: I built a home in Montgomery, N.Y., and moved in October 2006. The house cost $420,000 and we put another $15,000 in upgrades/appliances/furniture. My wife and I are looking to move back to our home town and be closer to our parents. I need to break even on my house. I put a lot of money down on this house. With the way the market is, I have been told I would lose money if I sold now. Would this spring be a better time to put the house on the market?
A: It’s not ideal that you are selling so soon after purchasing because prices in Montgomery are a bit off from a year ago, says Gene Currier, president of Coldwell Banker Currier & Lazier. I would recommend that you put the home on the market now if you need to move back home soon. By putting the home on the market, you would be ahead of others that may come on in the spring.
Inventory is on the high side for homes in this price range, but depending on the condition of the home and how it is marketed you could come out okay.
Q: I plan to put my house on the market this spring and try to sell it myself. If nothing happens in the first 4-6 weeks, I’ll turn it over to a Realtor. I live in a small college town and want to price it under $170,000, to attract new faculty and staff at the university, so I’m reluctant to make expensive changes, such as upgrades in the kitchen. The house is an oldie, built around 1890, so it won’t appeal to everyone even though it is in good condition.
So the question is, should I put money into the kitchen or let the buyer make the upgrades?
A: Buyers interested in purchasing historic homes generally have the vision to see beyond needed upgrades; therefore, I would probably not upgrade your kitchen prior to offering your home for sale, says Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors in Miami. Being able to offer your home at a lower price should do more to attract the buyer who is looking for a property with your home’s character. Most buyers for homes like yours also have specific ideas of how they would like to preserve the home’s features, so any upgrades that you make may not necessarily be the same upgrades that your buyer would prefer.
My recommendation is also based upon the price range of your area. There are many examples of historic homes across the country which have been totally updated and enjoy “restored” home values in the multiple millions of dollars. Obviously, it is easier to recoup the cost of an upgrade in areas where home values are higher.
Q: Can you tell me if the housing market in Atlanta is better than most places in the country to sell a house?
A: If you don’t have to sell, I would say don’t, because you’re competing in a very complex market, recommends Lewis Glenn, CEO of Harry Norman Realtors in Atlanta.
The first quarter is generally slow for home sales, and we should start seeing light at the end of tunnel at end of second quarter of 2008.
The high-end market, however, is holding very steady. We had the same number of high-end sales in 2007 as in 2006. Where we do see cracks in armor is in new-home construction, both in single-family sales and condos. We still have a lot of inventory on the market and more condos coming in.
It’s still a buyers’ market, but it is beginning to adjust to some degree.
Q: I have two son’s could you help advise them?
One son and his wife have been living with us in Northern Indiana for 3 years now. They would like to buy a house however they have some concerns which may make it difficult to do so. I am told these are a few of the problems: He and his wife have never owned a house before. They had to file bankruptcy due to the earlier divorce; he is behind on child support. Due to his living with us he has brought all other debts up to date except the child support which he is working on. He has to work out of state a lot to find work in his field.
My other son is trying to sell a house he bought as an investment and has been renting out. However his family has grown and they need a larger house. Therefore, he would like to sell both his house and the rental property, which is occupied. Could you give a step by step recommendation?
A: For the son and daughter-in-law living with you, the first step is your son needs to talk with a lender about being pre-approved, advises Karen Schlosser, president of the Cincinnati Area Board of Realtors. A lender will pull his credit report along with his income and debt data and determine what price range he would qualify for and/or what credit repairs, if any, are needed. Getting one’s credit in order is most important. What lender to go to? He should inquire with the bank and/or credit union he has accounts with. If he is not able to be pre-approved, he may want to consider a lease/purchase or a land contract. Both are forms of seller financing that allow a buyer to move into a property while making any necessary credit repairs prior to getting a loan through a lender.
Your other son has a couple of options depending on his goal. The first option is to sell both properties and put the proceeds down on a single property. He would be wise to check with an accountant about any capital gains that he may owe on the sale of either property. The second option is to sell the “family home” and keep the rental property as investment. Depending on how long he has owned the rental property, he might be better off keeping the rental property with a paying tenant, using the income from that property to help purchase his next home. There are rent vs. sell calculators on the web to help him analyze this option:
Q: What’s a landlord (in Florida) to do with nine nice homes that now have devalued to or below the loan amounts? Some mortgages have adjusted up and taxes and insurance have practically doubled! How am I supposed to sell these executive and starter homes?
My worst, negative amortization mortgages is currently 8.5% but will go up in June. I called to refinance five months ago, with excellent credit, but there is a $12,000 prepayment penalty. I had 10% equity in the property, but the value of my equity has dropped by $20,000. I will have to bring $65,000 to the table to refinance. I am in a Catch-22 with the credit crunch tightening lending standards.
A: Reading between the lines, it appears that you have purchased nine investment properties over the last few years with 10% down payments; and, that your nine separate negative amortization mortgages have now increased to the point that all, or most, of your equity has been eaten away, says Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors in Miami
With mortgage interest payments of 8.5%, real estate taxes, insurance and general maintenance and repairs, any rental income that you may be receiving is probably leaving you with an annual cash flow deficit equal to about 5% to 6% of the property’s value. For example, if one of your properties is worth $300,000, your total monthly cost of owning the property with an 8.5%mortgage equal to 90% of its value, plus taxes, insurance and upkeep, is probably between $2,500 to $3,000 per month. Most likely, potential rental income for that property’s between $1,250 to $1,500 per month. Therefore, even if you have it rented each month, your negative cash flow will be between $15,000 to $18,000 per year, or 5% to 6% of it’s value.
Don’t feel that you are alone. With money easy to borrow over these past 5 years, many investors purchased properties with very little cash investment. Unfortunately, that strategy necessitated a need to sell the properties within a short period after acquisition at increased values, rather than to hold onto them as long-term rental property investments. My advice would be to first organize your records so that you have a true picture of the sale value and rental value of each property. Once you feel confident with this information, I would contact each of your lenders to inquire as to whether or not they will consider discounting any of your mortgages and/or waiving any pre-payment penalties.
Then, I would begin immediately marketing those properties which have the most equity so that you can free-up those dollars to help you toward covering the deficits of the remaining homes. Time is the biggest culprit that you are facing. Don’t wait to begin taking action. Also, be sure to consult with your tax advisor. There may be some additional benefits which he or she may be able to offer.
Q: My wife and I would like to remodel our 12-year-old house in Durham, N.C., prior to putting it on the market in six months to a year. We have already put new carpet upstairs, and completely remodeled kitchen with tile, reworked wood floor and stainless steel appliances.
But we have a deck that really needs replacing, and would like to consider adding screened porch as part of the project. We also would like to remodel the master bath with new tile and cabinets. Would we be able to recoup our costs?
A: With home inventories at record levels in many areas, buyers have many more choices. So homes that are appealing and move-in ready — without major updating and/or repairs — usually sell faster, says Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors.
Kitchens and bathrooms are two areas of every home that influence the decisions of potential buyers. It sounds like you have already added some nice enhancements to your kitchen. Updating your master bathroom should yield a higher price for your home, provided that you keep the improvements in line with the home’s value. You wouldn’t want to install gold-plated fixtures or extravagant flooring in the bathroom of a modestly priced home. From your comments, it sounds as though the first dollars that you spend should be toward replacing your deck that “really needs replacement.”
As for adding a screened porch, I would probably let the new owner do that, unless every home in your neighborhood has a screened porch and you feel that every buyer is going to be looking for that feature. Remember, too, that even if adding an upgrade only returns your actual cost of making the improvements, it still may be worth the investment in helping to encourage a faster sale.
Q: We have been trying to sell a (rental) townhome in Denver, Colo., for six months and had a sparse 21 showings. The neighborhood is transitioning downward, and location has already been identified as our top negative selling point. Should we brace ourselves for going back into the landlord business to try and ride out the slump hoping that the real estate market will recover, or continue slashing the sale price trying to snag an entry-level buyer while the location is reasonably desirable.
The mortgage on the property is at 6.75%, 30-year fixed. We’ve owned the property for nearly 12 years. We have enough equity to survive a mild dump and run price reduction (roughly $30,000). But having just invested heavily to recover from the renter’s damage, there is some emotion tied to the idea of unnecessarily giving away money/profit. We started at $189,500, but have cut our price and is now $172,500.
A: I would recommend keeping your property listed for sale for another 30 to 45 days and then offering it for rent again if it hasn’t sold, says Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors. Even though it sounds as though you have had a tough rental experience, holding onto the property for another year or two should yield you a higher value than what you will probably receive today.
However, if the home’s location is a “real” challenge today, that will probably not change once the market rebounds. I would seek the advice of a local real estate professional to guide you as to the value adjustment that needs to be made due to the home’s location. It’s always hard to ignore the emotion of property ownership, so that’s why it’s a good idea to always seek the advice of a non-biased third party professional.
Q: I am getting relocated from Elyria, Ohio to Knoxville, Tenn., because of an acquisition. The company relocation policy has not been finalized. How can I determine what the replacement cost will be to get the equivalent type of home in Knoxville? My current home is 10 years old and 1,600 square feet.
A: Your company should refer you to a Knoxville broker who also has a strong relocation department to assist you, advises Jo Lay, vice president of relocation services for Coldwell Banker. Specifically ask to be assigned to a relocation trained agent who specializes in the market around your new work location. If your company does not offer a referral, locate a local broker via the Internet and contact their relocation department directly. Talk personally to the assigned agent and describe your current home and your “must replace” list. Give all details of your preference on age, style, number of rooms, and lot size. If your home is already on the market, e-mail the link from your home’s listing to the destination agent so they can really “see” your current home and lifestyle. (A 1,600-square-foot home in Knoxville should sell for between $185,000 to $195,000.) Photos of the exterior and interior of your home really help the agent best advise you on areas that will most closely replace your current home, schools, and lifestyle within your budget. Most importantly, you need to talk to a true “local expert.”
Q: How do you predict this housing downturn to affect smaller cities in Western Montana, particularly a small town like Missoula? I am currently renting. What signs should I watch for that will tell me to start looking to buy again? We lost money selling our previous home, we don’t want to buy and lose again.
A: The economy in Montana is very stable, but we always see a bit of a downturn in the real estate market this time of year, says Dan Wagner, president of the Montana Association of Realtors. The rental market is actually increasing. So if you are looking to buy, you can do that anytime. Rents are catching up to a point where it will be better to buy.
Q: I am single, age 29 with no debt of any kind and interested in buying my first home in the area in or around Grand Rapids, Mich. I have a secure job with an annual income of $60,000 to $65,000. I would be able to have a down payment of approximately $10,000 to $12,000. Can you tell me what price range of home I should be looking for?
A: It is difficult to provide you with an exact price range as so many additional factors come into play when evaluating what an individual may or may not qualify for, says Audrey Acquisti, president of Michigan Association of Mortgage Brokers.
When qualifying for a mortgage, the principal, interest, taxes and insurance on a prospective property are taken into consideration as well as the current interest rate. In earlier times the rule of thumb was 28% of a person’s gross monthly income could be used for their total house payment and 36% of a person’s gross monthly income could be used for total housing and all other monthly obligations.
In today’s mortgage market, an individual’s credit score has been shown to be the primary consideration when determining what the interest rate will be as well as the availability of products.
Sit down with an experienced, professional loan officer to determine, based upon the geographical area you may be considering, what you would qualify for. Ask the loan officer to provide you with a pre-approval letter before you begin shopping for a home. A pre-approval is when you provide income, expense and credit information to your loan officer and the loan is actually submitted to a lender for approval without a property having been determined.
Q: My employer is asking me to move to the Chicago area this year. I currently live in the Detroit suburbs and my house is surrounded by foreclosures. I live in an upscale community where I purchased my 2,200-square-foot, 3-bedroom, 3 1/2-bath home seven years ago for $320,000. I’m certain that if I could sell, I would have to settle for much less than $300,000, and I currently owe $150,000 on my mortgage. What could I expect to pay in the Chicago area for a similar home in a similar community?
A: Coming from the Detroit market at this time is a very challenging relocation experience, says Jo Lay, vice president of relocation services for Coldwell Banker. Hopefully your company will offer you a very competitive relocation benefit package if they want you to take this opportunity in Chicago. I have recently seen some companies who have employees moving out of the Detroit market offer “loss on sale” benefits, on top of the usual costs to sell the homes. There are two steps you need to take to prepare for your move.
First, meet with a relocation agent and ask them to complete a market analysis to determine the listing price range for your current home, and what the most probable sales price would be if you want to sell within the next 90-120 days. You mentioned foreclosures in your neighborhood, so your departure agent is going to have to be direct and honest with you regarding what your listing price will need to be to “beat the competition” in your neighborhood.
Once you have received a professional’s opinion, you will know what you are truly looking at as a possible sales price, and the approximate equity you will have to work with to purchase in Chicago. It is also extremely important to look at the absorption rates and days on market when determining what it will take to sell your home.
On the destination side in Chicago, you will probably be looking at the outer suburbs to try to get as much home as possible in your price range. A relocation agent will listen to all of your “must-haves” in a home, location of new workplace, and the price range to help you determine which areas would best fit your needs. Because of the increase in inventory in the Chicago market you have an advantage, you will have a lot to choose from when you get there. The market has a lot to offer in all price ranges and styles. When you decide to look in Chicago, you may need an agent in more than one market area to better evaluate all of the options in the different parts of the market.
Q: My In-laws have a mortgage on a double-wide manufactured home they bought new 5 years ago. It’s a nice home for this type of manufactured product and has a mortgage at about $100,000.
As you know, these types of homes tend to lose value even in good real estate times. The Problem: They have a 5-year balloon payment due later this year. The home has been appraised for about $72,000.00. I think you get the picture. How in the world can they refinance the home when it is worth about $30,000 less than its current mortgage balance? This has nothing to do with qualifying and making the payments. The mortgage has been paid on time for 5 years.
A: Your in-laws are in a tough situation, says Audrey Acquisti, president of the Michigan Association of Mortgage Brokers. Thousands of people are facing similar situations as property values have plummeted over the past year.
My first recommendation is for your in-laws to immediately get in touch with their current lender and ask for assistance. Many lenders are now trying to offer refinance options, modifications of the existing loan and other means to allow homeowners to stay in their homes. Contrary to popular belief, mortgage lenders and banks do not want to see homes go into foreclosure. No one wins in a foreclosure situation.
You have indicated that your in-laws have paid their mortgage payments on time for 5 years. This fact should help them tremendously when negotiating with their lender.
I can make no promises as to what their particular lender would do, but I would certainly hope they will agree to work with them. If they find no satisfaction following this path, I would suggest they consult an attorney, either paid or free legal, and seek assistance from a non-profit counseling agency in their area.
