Cash In on the Housing Rebound
Whether you're buying or selling -- or both -- now is a good time to make a move. Staying put? You can tap your growing home equity.
Six years after the housing bust, home prices are rising and sales are surging. As of June 30, prices had increased 8.6% nationally from the year before, reports Clear Capital, a provider of real estate analysis and data. On average, home prices have risen 10.8% since the trough in August 2011, but they’re still well below their peak.
If you've been waiting to buy or sell, now is as good a time as ever to go for it. Sellers have plenty of prospects and buyers can seize interest rates that are still historically low, despite a recent spike of nearly a percentage point. Although rising mortgage rates are prompting some to worry about affordability, rates would have to go a lot higher before most buyers are priced out of the market. Not moving? You can take advantage of super-low rates to borrow against your rising equity -- perhaps for a remodeling project -- or even do a cash-out refinance.
During the housing bust, Tim and Kathleen Murphy of Sacramento, Cal., shelved their plan to sell the home they had owned for 15 years and move closer to downtown and their sons' school. But in December 2012, they felt the time was right to act.
Home sales in Sacramento have been brisk, so the Murphys knew they could sell fast. But they weren't sure how quickly they could buy. Their listing agent advised them to price their three-bedroom, two-bath home at $230,000 -- $30,000 more than they had anticipated -- and within a week they received five offers. They sold for $235,000 to buyers who were willing to "lease back" the Murphys' former home to them for 90 days after closing. That bought the Murphys time to find their next home.
After looking at more than 20 homes, they found a house near the high school that their sons, Declan and Jack, attend. The 1960 rambler needed work, but the Murphys thought it had potential. The asking price was $299,000, but given its condition, they offered $288,000 with contingencies for home and termite inspections. They put down 10% and saved the balance of their equity (about $60,000) to update their new home. Then they nabbed a 30-year mortgage with a fixed rate of 3.6%. "We got a screaming deal," says Tim.
In most markets, limited supply has given sellers the advantage. The rush to snap up homes and pounce on low mortgage rates has even sparked bidding wars in some areas. For the first time in years, you can expect that if you prepare and price your home right, it will sell quickly and for full price or more. But because sellers are usually buyers, too, strategies such as the lease-back the Murphys used can help smooth the transition from a home sale to a purchase.
If you are selling your home and then buying, it probably doesn't make sense to wait for higher prices. While you wait, you pay for your current home and watch the price of your next home -- and possibly mortgage rates -- rise to offset some of the potential increase in your current home's value. If you're still hung up on what your home was worth at the top of the market, get over it. "That was unrealized gain that you won't get back in the foreseeable future," says Gayle Henderson, a real estate agent in Scottsdale, Ariz.
Price it right. It will move quicker, and you'll avoid the frustration of reducing the price and keeping your home prepared to show. Plus, you'll ensure that your home will appraise for the sale price, a necessity if your buyer needs a mortgage. To set the price, you and your agent should look at comparable sales in your market (within a mile or two of your home) for the past two to three months. It’s smart to visit your competition, too, so that you can see what they're offering for the price. Henderson recommends that before her clients list their homes for sale, they pay for an appraisal (about $400) and a home inspection (about $125).
Make it stand out. "People are chasing the nicer properties," says Chris Little, the Murphys' agent in Sacramento. Declutter and make small repairs. The more expensive your home, the more sense it makes to invest in staging. Buyers love a home that’s move-in ready and has goodies such as granite countertops. But if you don't want the hassle of meeting their expectations, price it accordingly. If buyers must spend time and money to update the kitchen, bathrooms or rec room, they will want to pay a discounted price, says David DePaola, an agent in Ewing, N.J.
Weigh the offers. Say that you receive multiple offers from qualified buyers who are prepared to increase their offers with escalation clauses. How do you winnow them and choose a winner? Here's what Dana Hollish Hill, an exclusive buyer's agent in Bethesda, Md., recommends: Go for the cash offer first. If all of the bidders have a financing contingency, then start with the offers that aren't contingent on an appraisal. Your agent can ask those buyers to begin bidding against one another. Whose offers are the highest and second-highest? Will the second-highest bidder go higher than the top bidder? That outcome determines your winning offer.
Of course, that scenario may not always play out. If you're selling a home that will appeal to first-time buyers, your prospects probably can't afford to omit financing contingencies. They may have only enough cash to make a down payment and get a mortgage, much less up the ante.
If you just bid on a home and need to sell your old one quickly, you will have more protection against the deal falling through if you accept a cash offer. But if your buyer needs a mortgage and the deal is contingent on a home appraisal, your agent should be prepared to assist the appraiser. That may mean meeting the appraiser at the front door with a folder of relevant comps that the appraiser might miss.
Buying in a Seller's Market
If you are moving up (or downsizing), coordinate your sale with a strategy for finding your next home. One option: Sell first and rent back, as the Murphys did. Another option: Buy first and try to sell your former home before you close. Either strategy allows you to shop with less pressure and make a competitive purchase offer that isn’t contingent on the sale of your previous home.
Selling quickly after you buy is a reasonable prospect, but you still must be prepared to make both mortgage payments for as long as it takes to sell your first home after you close on your purchase. In the past, sellers may have taken out a short-term bridge loan to cover the cost. Those are all but extinct now, except for well-heeled borrowers whose banker may make the loan using their assets as collateral.
If you have enough savings and income, you have still another option: Keep your old home for the time being, with the possibility of renting it out. Last spring, Bryan Duff and Meghan Taylor of Minneapolis wanted to buy a larger home in anticipation of starting a family. They were preapproved to buy a home for $410,000 without having to sell their suburban townhouse. They decided to start at $350,000, but found that homes at that price point were moving really fast. Online listings were sold before they could visit, and homes they visited already had multiple offers.
They made two unsuccessful offers. By their third try, they were looking at homes priced above $400,000, which seemed to have less competition. They saw a hot prospect -- a 100-year-old Craftsman-style home with three bedrooms near Lake Calhoun -- and an hour and a half later placed a full-price offer of $409,000 with a home-inspection contingency. They agreed to allow the owner 60 days to close -- and beat out one other offer. The couple were scheduled to close in mid August. They put down 5% and locked in a 30-year fixed-rate mortgage at 3.78%. Although they spent more than they had planned, the home is move-in ready. They haven’t decided whether to sell or rent out their townhouse.
Other strategies that will make your bid stand out in a competitive market:
Pay cash. Sellers love a cash offer that they know won't bump up against an appraisal and can close quickly and easily. But if you have the means to pay cash, consider whether it’s the wisest use of your money. The idea of forgoing a monthly mortgage payment may be appealing if you're approaching or in retirement. But the average historical rate of home-price appreciation in the U.S. is between 4% and 5% annually, according to Clear Capital, and that's before subtracting for inflation. Your home may not be the best place to park your cash. Plus, to get your money out, you must pay to borrow against the home or sell it.
Get preapproved. If you need a mortgage, sellers will expect you to get preapproved for it by a lender who will determine that you can afford payments on a mortgage for a certain amount. Having a preapproval amount will also help you avoid wasting your time looking at houses you really can’t afford and rein in your competitive spirit in a multiple-offer situation. Remember: The lender doesn’t consider utilities, transportation, child care or other expenses.
Preapproval will also confirm whether you qualify to carry two mortgage payments simultaneously or need to sell your current home first. To qualify using rental income from your former home, you must meet stiff requirements. Your lender will require you to have reserves equal to at least six months of payments and proof of six months' worth of rent-loss insurance, plus what may be the deal breaker: a history of managing a rental property for at least two years.
If you're in a hurry to find a home, Hollish Hill says you should look for a local lender who will commit to getting the deal done in 30 days, if need be. The lender must also provide a letter specifically written for each property you bid on, so you don't reveal to sellers that you can afford more than you're offering. You can shop other lenders for the best mortgage after you have a ratified contract. Besides a preapproval letter, sellers may want you to provide proof of funds (savings and investment statements) with your offer and fill out a buyer financial-information worksheet.
Adapt. Given limited selection, be prepared to adjust your must-have list. You may have to cast a wider geographic net than you originally planned or compromise on size and other features. Also, consider starting your search with homes priced lower than you can afford. If you don't find what you want at the lower end of your range, you'll have room to look at higher-priced homes or bid above asking price, if need be. And take a look at homes that have been for sale longer than most in their market. They're overpriced given their location, presentation or condition. If the seller is ready to get realistic, you may have a crack at it -- with little competition and even with contract contingencies.
Make a strong offer. Not all properties attract multiple offers, but if you have competition, make a full-price offer. If your means allow it and you really want the house, you may have to bid above list price and include an escalator clause that will lift your offer a certain amount above the highest bidder's, up to a maximum amount. If you need to add contingencies, your agent should help you find a way to make them more palatable to the seller. Don’t rule out a contingency for a home inspection, but ask to have it done while the seller is still accepting offers or indicate to sellers that you won’t expect them to make repairs.
Not Moving? How to Cash In
If you have no plans to sell or buy, you can still cash in on your home. Rising home prices mean you have more equity and more options. You can refinance to cut your monthly mortgage payment and total interest, do a cash-out refi to simultaneously refinance and extract equity for other purposes, or borrow against your home equity for, say, home improvements. Plus, if you've been paying for private mortgage insurance, you can cancel it when your loan-to-value ratio falls to 80%. (At 78%, the lender must cancel it automatically.)
When Susie Brown and her husband, Tim, looked into increasing the limit on their $10,000 home-equity line of credit, they weren't planning to refinance their mortgage, too. But as borrowers who owed less than $150,000 on their home, they were told that they could reap substantial savings through U.S. Bank's "Smart Refinance" program, which promises a streamlined paperwork process, no closing costs and a fixed interest rate. In June, the Browns cut the rate on their mortgage by nearly a point. At the same time, they opened a $38,000 home-equity line of credit, starting with a 1.99% interest rate that rises to 3.99% after six months. They’re using about $20,000 of the credit line to gut and renovate the only bathroom in their St. Paul, Minn., home.
Tap your home's equity. After a sharp drop during the housing crisis, home-equity lending is bouncing back in some areas as home prices recover and lenders' books strengthen. Though underwriting standards remain more stringent than before the housing crash, creditworthy borrowers may see a revival of certain perks, such as the 1.99% teaser rate the Browns were able to snag.
Some lenders are willing to stretch total borrowing, including both the mortgage and the home-equity loan or line of credit, beyond the usual comfort level of 75% to 80% of the home's market value. Michael and Summer Pickering of Muncie, Ind., hit a 90% loan-to-value ratio when they took out a $26,000 line of credit on their current home to help them buy and renovate a foreclosure. Their HELOC, from Industrial Centre Federal Credit Union, is free of closing costs, with an early-termination fee of $1,000 if they shut down the line before a year passes. Their interest rate matches the prime rate, recently 3.25%.
A HELOC usually comes with a variable interest rate based on the prime rate plus or minus a set number of percentage points, called the margin. HELOCs are often best suited to ongoing projects, such as a big home remodeling project, which may require draws of money. A home-equity loan, which typically bears a fixed rate, is good for paying off a set cost, such as consolidating credit card debt.
In general, your FICO score should be about 700 to 720 or higher for you to qualify for a home-equity loan or line of credit, although lenders may be willing to work with borrowers who have somewhat lower scores. To snag the best rates, you'll often need excellent credit, with a score of about 760 to 780 or higher. (The average rate on a variable-rate HELOC was 5.14% recently, and the average rate on a fixed-rate home-equity loan was 6.14%, according to Bankrate.com.)
Expect to hand over as much documentation as if you were applying for a first mortgage, such as pay stubs for the past couple of months, two years of W-2 forms or tax returns, and bank statements that reveal savings and other assets. Find out how long a HELOC's draw period lasts, whether any prepayment or early-termination fees apply, whether a HELOC’s variable interest rate has a lifetime cap, and how often and by how much a variable rate may adjust.
As you shop, check with a range of lenders, including any banks or credit unions with which you currently have relationships -- you may get a break. A Wells Fargo customer, for instance, could get a discount of anywhere from one-fourth of a percentage point to more than one point on the rate for a home-equity loan or line of credit, depending on the level of the borrower's relationship with the bank, says Brad Blackwell, portfolio business manager for Wells Fargo.
Is It Too Late to Refinance?
As long as you can realize significant savings by refinancing, don’t worry about whether rates will go up or down, says Guy Cecala, publisher of Inside Mortgage Finance. Generally, you should go for it if you can trim 0.75 percentage point from your current rate, minimize your out-of-pocket closing costs (say, by rolling them into the loan balance), and save a meaningful amount on your monthly payment. If you’ll pay your closing costs out of pocket, then you should recoup that cost in savings within a year, says Cecala.
Lock in the best rate you can get now, and don't worry about having missed out on the lowest-ever rates. If you're still underwater on your home (your mortgage balance exceeds the market value of your home), you can pursue a refi through the federal Home Affordable Refinance Program.
If you have a substantial amount of equity in your home, another option is a cash-out refi. You can use the cash to pay off other, more expensive debt, improve your home or meet other goals. Most lenders require you to maintain at least 20% equity and have a higher minimum credit score than they would otherwise require for a refi. Because you're decreasing your stake in your home, you will pay a premium on the interest rate for the privilege. Borrowers with a credit score of 740 or better and a loan-to-value ratio of more than 60% (up to 75%) will pay an extra 0.25 point. Still, you may find it cheaper to tap your equity this way than through home-equity borrowing.
What's Pushing Up Home Prices
An improving economy and job growth, plus super-low mortgage rates, have unleashed demand for homes. But buyers -- especially ones looking for lower-priced homes -- face stiff competition for a limited number of properties.
Why is inventory low? In some cities, institutional investors have been scooping up properties to rent out, including a diminishing supply of foreclosures. Builders cut way back on new-home construction during the bust, and although they have begun to ramp up production again, they're struggling with shortages of land, labor and materials. And homeowners who bought at the top of the market are still reluctant to sell until they can recoup more of their investment; some 20% of owners are still underwater, owing more on their mortgage than their home is worth.
Even when those homeowners are ready and able to sell, most of them will want to buy again -- a wash for inventory -- says Lawrence Yun, chief economist for the National Association of Realtors. Yun thinks the inventory shortage will remain acute through 2015, bolstering above-average increases in home prices.