As the stock market stumbles and interest rates slowly creep up, financial advisers and bank officials say people thinking about refinancing their mortgage, taking out an equity loan for home improvements or even buying a new residence shouldn’t automatically give up on their plans.
On the other hand, they shouldn’t rush into making commitments without careful consideration either.
“With the home market seemingly going crazy, it’s important that you decide what you really have to have in a home—whether it’s a new one or you are remodeling an old one—and to decide how long you plan to be in your new home or remain in your old one,” says Joan Sharp, who counsels Delaware investors through her River Family Advisors.
“The market is still recovering from the mortgage collapse of 2008–2009, and it took 10 years to get back to pre-crash values,” adds Jeff Ruben, president of WSFS Mortgage. As a result, the rises in housing prices and loan interest rates should be viewed from a longer-term historical perspective while recognizing the housing market continues to adjust.
“We are shifting away from rate and term financing, which for the last three or four years was very popular, and are shifting toward need-based refinancing,” Ruben says. Rate and term financing is where the homeowner can get a better rate on a home mortgage loan and takes out a new mortgage, perhaps for a different period, and pays off the old one.
William Starnes of Mallard Advisors agrees: “I would avoid refinancing if you already have a much lower mortgage rate.” Sharp also warns about gambling that a variable-rate mortgage will in time work to your advantage in a volatile market.
Here is where need-based refinancing comes in. The timing may be an advantage because it is quite possible your home has appreciated in value over the past two years—the same market economics driving higher prices for people who want to buy homes. Even though you aren’t putting your home on the market, don’t forget that it might be appreciating.
One option that does involve refinancing a mortgage, Ruben explains, is what is called cash-out refinancing. This means you seek a new mortgage to pay off your old mortgage, plus receive extra cash based on the amount of equity you have in your house. Of course, this will affect the term of your new mortgage and the interest rate. But cash-out refinancing may be advantageous if you have a lot of equity in your home and if your new mortgage rate is lower than getting a separate loan. Plus, you still have only one payment.
There are other options, however: “If you need money short-term, you should utilize the equity available in your home by having a home-equity line of credit,” Starnes points out. “These are generally free to open and maintain.”
Thinking longer term, Starnes also advises against waiting to open a line of credit until you actually need it, as a line of credit is easier to get while you are still employed and not after being laid off or having retired. Starnes does not recommend home equity loans for those who are not “financially disciplined.”
“Never used home equity loans as a long-term financing tool,” Ruben warns, adding that his bank still offers construction and bridge loans for those wanting to do remodeling or repair, whatever the reason.
Sharp raises other considerations, and advises not to take out a loan to fix up your house before putting it on today’s market. “Don’t put a lot of time or money into this,” she says, “because people are now more than willing to buy ‘as is.’” She also says you should remodel your house “only if your neighborhood can afford,” meaning you won’t get your investment back if your house is valued at more than those around it.
“If you look at the long-term history of mortgage rates, current rates don’t look so bad anymore,” Starnes says, which younger buyers might not realize. “The reason we’re unhappy is that [mortgage rates] were just 2.75% only a year ago, so we may have some regrets over not moving earlier.”
If you’re forced to bid on a new home, Sharp advises that “being able to close rapidly may be a decider for some sellers. And being able to close without an inspection, or if you have more cash in the deal, may also be favorable tactics.”
Finally, while buying a house might still be a good option, Ruben says we could be reaching a limit on what mortgage rate might be acceptable.
“For many people, 6% appears to be a psychological barrier not to move beyond.”
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