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.
Are you Financially Healthy?
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.
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 one. 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.
Keeping Your Current Home as an Investment Property?
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.
So where does that leave you? You are in the driver’s seat. Few times in recent memory have we had an interest rate environment this low and the valuation of your home so high. For many homeowners, stay and refi is the best short and long term investment.
However, the question is, how does this accomplish your financial plan? What is your plan? What would a plan look like is $100,000 was available to you right now to solidify eliminating debt. Securing investments. Creating an emergency fund to ensure job stability.
Let’s connect and have a mortgage partner set a plan for you: https://refi.com