Should You Fix Up Your Home or Trade Up?

With mortgage rates so low, you may be asking  yourself if you should trade up your home to a larger one or if you should look into  an equity line of credit and add on additions to your current home.

Money magazine has a detailed article in their April, 2013 edition that looked at two case studies. For one family, they needed more room than their current home could be expanded to. For the second couple, they were happy adding on for what they needed.
The case studies evaluated how much space was needed, what the budget would be, the ROI, and the impact on the homeowners.  The couple that remodeled their home will have to find a short term rental apartment for the six months that their house is being renovated. The family that traded up has the cost of movers, but they may need additional housing if they sell their home before they close on the new one.

So what should you look into?

Step One – Is Selling a Realistic Option?

If homes in  your area aren’t selling, you may not have much choice. Of course, you could look into turning your current home into a rental, and buying a new home. Again, you’ll need to do some soul searching to decide if you want to be a landlord, and if your finances can afford that option.
Also, if your credit is not very good or you’re buried under credit card debt, you should probably wait until you’re on more stable ground.

Step Two – Do You Want to Move?

If you really love your neighborhood, and the schools, and the shopping, parks, bike paths, neighbors, you may want to ask yourself if you really want to move.  If the answer is no, then you can start to look at how much extra space do you want, and if it’s possible with your current home and lot size.

Step Three – Where Do You See Yourself in 5-10 Years?

If you’re in a small townhouse, and you intend to start a family, you may want to look into buying a new house.  If you’re in a medium size house, but your kids will be gone by then, you may want to stay put.  You may be retiring in 5-10 years and no longer want a house with stairs, or one that’s closer to more senior activities.

Step Four – Crunch Those Numbers

You may want the help of a tax advisor when you look at whether or not you will be subject to capital gains taxes if you sell your current home.  Consider having a home appraiser come in to let you know the current value of your home.  Ask them how it would impact the value if you added on the additions.  Also, you will want to have a home inspection to identify any major or minor repairs that would need to be done before selling.
A good general contractor can help you estimate the costs involved with the remodel. You can estimate costs of green upgrades and other remodeling that you may have been wanting to do.
Figure out if you would need to spend time living in a rental while your home is being remodeled or if you sold your home before you bought a new one.
Get an estimate from movers if it’s free with no obligation.
Calculate your expenses if you sold the home including termite inspection, home inspection, closing costs, any penalties for early pay off of your current mortgage, etc.
Then add it all up.

Step Five – Think and Talk

Spend some time on your own thinking, and spend some time with your partner talking about the whole situation.
And do remember, if you remodel, you will get it exactly how you want it.  However, if you’re not that happy where you’re living, you could find your dream home and have the opportunity to move into it.  Zillow has a useful article with some calculators here.  They also provide a list of the return on investment for remodeling areas of your home.

Step Six – Look Into Financing

Talk to your mortgage loan officer to find out what you would qualify for with a new mortgage or with a home equity line of credit.  They may have some programs available that would be perfect for you.

Households Return to Borrowing Ways

The fourth quarter of 2012 reflected that consumers are starting to feel more comfortable about borrowing after years of cutting debt. Household debt rose 0.3% to $11.34 trillion. Household debt includes credit cards, student loans, auto loans and mortgages.

 

 

New Mortgage Debt Increases

Per the Wall Street Journal:

Americans took out $553 billion in new mortgages to buy homes, and far fewer consumers fell into foreclosure. That nudged up the amount of mortgage debt. The upshot: After years of shrinking, the nation’s mortgage tab—the biggest source of consumer debt—is stabilizing and possibly poised to rise.
The report suggests Americans are recovering from their boom-era debt hangovers. If consumers shape up their finances, they might be more willing to take advantage of historically low interest rates to buy homes and spend more. That could boost hiring and revitalize growth. The economy grew at an annualized rate of only 0.1% in the fourth quarter, the Commerce Department said Thursday.

Economists at the New York Fed noted that the uptick in consumer borrowing using car loans and mortgages seems to indicate that the central bank’s low-interest-rate policies are succeeding.
We Americans still don’t have as much debt as a few years ago down from a peak of $12.7 trillion in 2008. Credit card balances also fell 4% throughout 2012 suggesting that many of us aren’t spending freely on big-ticket items either.

Still, Americans are gradually borrowing more to finance other things like homes and cars.
Overall housing-related debt, including home-equity loans—where consumers borrow against the equity in their homes—was roughly flat at $8.6 trillion late last year. But that masked considerable improvement: A combination of rising mortgage debt and a 13% fall in foreclosures offset an increase in defaults on home-equity loans.

Distressed Properties Prices On Rise As Well

Per TheStreet:

Distressed property prices are rising on the back of strong investor demand and limited inventory, RealtyTrac said in a report released Thursday.
Properties in foreclosure or owned by lenders sold for an average price of $171,704 during the fourth quarter, increasing 2% from the third quarter and a4% from the fourth quarter of 2011.
Short sales — where the borrower and bank agree to sell the property for less than the amount owed — also saw improving prices, helping to reduce lenders’ losses. Short sales in 2012 were short of the loan amount by an average of $81,621, down 7% from an average $87,809 in 2011.
Mortgage technology firm FNC measures the foreclosure discount by comparing the foreclosure sale price to the underlying market value of the property, which is the market price the seller would receive if the property were sold under normal circumstances.
FNC last week reported that the foreclosure discount had dropped to 12.2% in the fourth quarter of 2012, compared to the 25% discount seen at the peak of the credit crisis in 2008 and 2009.
According to that report, higher-priced foreclosed homes were selling for close to market value, while lower-priced homes still suffered an 18.4% discount in the fourth quarter of 2012.
According to RealtyTrac, the average price of a foreclosure sale is at a 30% discount to the average non-foreclosure sale price.
Distressed property sales still account for 43% overall existing home sales, which has the effect of depressing overall prices.
However, the number of new foreclosures have been declining, while the existing inventory of foreclosed homes has been rapidly seized by yield-hungry buyers.

So, mortgage rates are still at historic lows, but may not be for long if more people are applying for mortgages, investment mortgages, refinances, and home equity lines of credit. As we discussed in a prior post, mortgage rates vary based upon a variety of factors, including the number of people applying.
So if you’re looking into whether you should apply now, contact me.  I am a reputable mortgage loan officer who works diligently to stay on top of rates and market factors that impact the mortgage market. I will be able to help you find the right options whether you’re a first time buyer or looking to pick up investment properties.