A National Association of Realtors “30 Under 30” agent, serving the Del Mar/San Diego luxury residential market with Anderson Coastal Group.
With record-low interest rates over the past year, homeowners are pursuing the next phase of their homeownership journey. The hot seller’s market is convincing some to capitalize on the low inventory and bidding wars we’re seeing across the country to sell their home for more than previously possible. Others aren’t quite ready to take that step and are looking to refinance instead. There are benefits and considerations to weigh for both options to decide which is right for your personal financial situation.
How does your current financial health look?
If you are making more money, have better credit and are carrying less debt now than when you previously purchased, you are in good shape to get a better deal on a new loan — whether that’s through refinancing or selling and buying a new home.
But if any of those three critical factors are rocky or worse off, then you should consider waiting. In the wake of the pandemic, not only is employment status more up in the air than ever before, but lenders are also tightening their requirements. Higher credit score requirements and increased employment verification are a few of the sticking points I’m seeing. Speaking with a loan officer or your personal financial advisor or CPA is always a great place to start when making a large financial change.
If you sell now, will you have the right tools to be competitive with the next house you buy?
In the hyper-competition of today’s market, some sellers are finding themselves in a tricky situation when they are faced with buying a new home after selling their current. Putting 30% to 40% down instead of the long-standing 20% is now considered the norm, and buyers are also waiving their appraisal and inspection contingencies to beat out the competition. I’m advising my buyers to look at least $100,000 below their top budget to have room to go up in a multiple offer situation.
The good news is that starting as a seller could set you up for success for your next purchase if approached strategically. Staging, pre-inspections, virtual tours and home improvements can all enhance the value and attractiveness of your home, and a good real estate agent will have a step-by-step strategy in place for corralling showings and offers. And with so many buyers using escalation clauses, that extra money could provide you with added funds to purchase your next home.
If you aren’t in a place to be competitive when purchasing, consider selling to maximize on the current market and then renting for a year to see how things unfold.
Are you able to keep your current property as an investment opportunity?
Another great option is to refinance your current home and repurpose it into an investment property. The rental market for single-family homes is expanding with such low sales inventory, and then you can generate passive income to cover your first mortgage. You can also look into participating in a 1031 exchange down the line when you are ready to continue building your wealth.
How long have you owned your home?
If you’ve owned your home for less than two years, you will likely be subject to capital gains taxes and won’t be allowed to take the $250,000 or $500,000 exclusion. In a market this hot, it’s possible you could sell for enough to cover that cost depending on how much your home has appreciated. But it would then negate most if not all of the money earned in the sale.
If capital gains taxes aren’t a concern for you, you should still consider the amount of time you’ve owned your home for a few key reasons. The equity you’ve built in your current home is dependent on length of time and length of the loan and can be a strategic tool in your financial tool belt. Homes that haven’t sold in several years will also likely have appreciated far beyond the price you paid. Checking with a licensed real estate agent who can pull nearby market activity is a great way to get an idea of what your home may be worth.
Do you plan to stay in your current home for less than five years?
One of the most crucial considerations when refinancing is how to balance the closing costs of your new loan, especially since you aren’t technically making any money like you would in a sale. This is called the breakeven period, and it’s calculated by dividing the closing costs by your monthly savings. For example, if your closing costs are $3,000 and the new loan will save you $50 per month, it will take 60 months (five years) to break even on the refinance. If you aren’t planning to own or live in your current home that long, then the expense of refinancing likely isn’t worth it.
Is your current home fitting your needs?
Home needs and wish lists are evolving rapidly. Since the beginning of the pandemic, the search for more square footage, outdoor space or pools and dedicated workspaces has risen drastically. If your current home isn’t meeting your needs, then no refinance will help change that.
But no one can predict how long this hot seller’s market will last, and with interest rates predicted to begin creeping back up, now may be your best chance to make a strong financial decision for you and your future wealth.
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