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A client asked me how she can find out whether she would save money by either making additional principal payments each year or refinancing my mortgage?
I created a calculator for her using Excel so that she can visually see the answer to her question and I thought it was kind of cool so I have decided to share it with all of you. She owed $167,000 and had about 25 years left on a loan with an interest rate of slightly less than 5 percent. She could either lock in at less than 3 percent on a 15-year fixed-rate mortgage or she can make additional principal payments each year on her current 30-year loan. The first thing I determined is determining how long she planned to remain in the house. If she anticipated moving in a few years, it would not be a good idea to pay thousands of dollars in closing costs just to lock in that lower interest rate. Making additional principal payments will reduce her total interest expense, but she will be stuck with the higher interest rate and refinancing, would get a lower rate of interest, but she could make additional principal payments. The chart below, while only estimating her situation, shows how she could make additional principal payments on her current loan equal to the difference in payments between the existing loan and a new 15-year loan at 2.95 percent interest, and she would still pay $48,533 in interest expenses versus a new 15-year refinancing. Another benefit is refinancing also shortens her loan term by 3 ½ years. Additional payments vs. refi Current loan w/additional principal payments 15-year refinancing Difference Loan amount $167,000 $167,000 Interest rate 4.95% 2.95% 2% Loan term (months) 222 180 42 Payment $971.41 $1,149.26 $(177.85) Additional principal payment $177.85 $- $177.85 Total monthly payment $1,149.26 $1,149.26 $- Total payments $255,400.16 $206,866.74 $48,533.42 Total interest expense $88,400.16 $39,866.74 $48,533.42 This analysis doesn't include closing costs from a refinancing or the potential reduction of the mortgage interest deduction on her income taxes. Even so, it's clear refinancing is a better option than making additional principal payments on her existing loan if she plans to be in her home for a long time. Are you thinking about refinancing? Allow me to provide an analysis of your situation to assist you make the decision. Till next time my friends!
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Real estate has distinct momentum heading into 2013, with demand finally
starting to catch up with supply and significantly fewer distressed properties weighing down the system. As 2012 wound down, the national vacancy rate for owned homes had dropped to 1.9 percent from a downturn high of 2.9 percent. That's still above the 1.5 percent norm but nevertheless encouraging. The ever-optimistic National Association of Realtors predicts a 5 percent rise in median existing home prices through 2013, though most forecasters see a more modest 3 percent upswing in real estate prices. Either way, the real estate market is thawing, unless you're living in such hard-hit areas as California's Inland Empire or dodgier parts of the Rust Belt. With the new year upon us, here are 10 real estate tips to see you through a more promising 2013. Tip 1: Get off the sidelines For good-credit buyers waiting for the bottom of the market, it has passed, but the good news is that home prices and interest rates are still quite low. For sellers waiting for market improvements, they're here. Stretch, take a deep breath and jump back in the game if your budget allows. The rules have changed a bit, however, and lenders want buyers to put a little more skin in the game. So expect to make higher down payments than in those pre-bust years. Another caution: Sellers will likely find that buyers have a harder time qualifying for mortgages. Tip 2: Screen your buyers Save your time, and weed out the tire-kickers. Make sure potential buyers are preapproved, which means they've already had their credit and employment checked thoroughly to determine how much they can borrow. Have your agent call their loan officers. Serious borrowers will find this acceptable because it shows they are ready to act. Tip 3: Create a good impression Most folks start their home searches online these days, so the number of murky, drab photos posted on website listings is baffling. Consider hiring professional photographers or videographers to create an optimal presentation, particularly for high-dollar spreads. Winter exteriors might show sun shining off the snow, spring shots could sport blossoms, summer shots ought to spotlight that shimmering pool or well-coifed lawn, and fall photos might show vibrant leaves. Think vividly, but not deceptively. Shots should accurately reflect the depth of rooms. Interiors should show bright, uncluttered spaces and highlight the best outdoor views. Remove a few furnishings for your photo session and brighten up (or even repaint) dark rooms Tip 4: Renovate wisely A thorough remodeling can help seal a deal, but it rarely pays for itself. In fact, the average remodeling payback in the past 10 years has dropped from 82 percent in 2003 to about 57 percent, according to Remodeling magazine. Bringing up the rear are added back-up power generators (47.5 percent return) and sunroom additions (45.9 percent). Topping the list are steel entry-door replacements (73 percent return) followed by garage door replacements (71.9 percent). Unless the place is a wreck, focus on the small stuff: Sellers routinely underestimate the positive impact of simple home improvements such as repainting and minor fix-ups, say 3 out of 4 Realtors. Tip 5: Build your team wisely Vet the help. This goes for such crucial players as your agent (interview at least three), your inspector, appraiser, title company and if applicable, your attorney, surveyor or even energy auditor (a good idea if you're buying a large home). Look them up at the Better Business Bureau, Angie's List and any of a number of websites where service reviews can be found Tip 6: Don't let the heart lead the head No clinging to false hopes, please. Win the game of "the price is right" by pricing your house correctly from day one. Find a proven, seasoned agent and follow his or her lead on listing-price suggestions. Pricing should be based on comparable sales, specific neighborhood time-on-the-market trends, an up-to-date appraisal and the home's inherent pros and cons. No amount of marketing hocus-pocus or staging can overcome a bloated price tag. Cut your price if no serious offers emerge in the first 30 to 45 days. It's not 2006 again. Tip 7: Open your marketing options Give your agent (or yourself) the green light to creatively market your home in varied venues, be they virtual or terra firma. Sellers are tapping into Twitter, Facebook, Pinterest, LinkedIn and any number of sites to tickle buying bones. Agents and owners are customizing websites and blogs as well. But be tactful and imaginative. For example, a blog called "What you'd like about living in my town," might cover culture, education and other quality-of-life niceties -- followed by a playful pitch for your home, of course. Social media, unlike listings on the Multiple Listing Service or newspaper ads, allow for quick feedback and Q-and-A. You might also suggest your agent market your home to foreigners via overseas property sites or local partners abroad and to corporate relocatees. Tip 8: Run the numbers Are you really poised to buy? The housing market is improving, but that doesn't mean exuberant buyers should write a check and empty their savings accounts. Back up a bit and first get a free copy of your credit report, then fix any blips to save on higher mortgage interest rates. Break down your essential monthly bills and reconcile them against your family income, then use an online mortgage calculator to see how much wiggle room you'll have once you buy. Remember to factor in closing costs, inspection fees, loan fees, legal fees and emergencies. Tip 9: Work your ground game You're not just buying brick and mortar, you're buying a neighborhood. Consider this short checklist before making your buying decision.
Tip 10: Leave nothing to chance Switch on that stove, run the faucets (including the baths), check the water pressure, activate the sprinklers, turn on all the lights, flush the toilets, turn on the air conditioning and heat, test the remotes and venture into the closets and look for signs of brown splotches or fresh paint for evidence of roof leaks. Granted, you might not feel comfortable doing all these at the open house, but you certainly can at the final walk-through. Sometimes agents and inspectors miss things. Flipping earned a bad reputation during the housing boom thanks to
speculators who bought and sold millions of homes in search of easy profits. But the practice is gaining popularity again. As the nation’s real estate market shows signs of life. The number of flips rose 25 percent during the first half of 2012 from the same period a year earlier, according to research firm RealtyTrac, and the gross profit on each property averaged $29,342. RealtyTrac Vice President Daren Blomquist said the resurgence in flipping offers another indication that, in many parts of the country, housing prices have finally stopped falling. “There are flippers in any market, but a market where home prices are appreciating is much more forgiving for flippers than a market where prices are depreciating,” Blomquist said. “We have turned that corner in a lot of places in the last six months, so that’s going to attract flippers.” Areas of the country that have been hit hardest by the housing crash have the most opportunities for flipping. The SF Bay Area is a wonderful place for these opportunities. Even though, we did not get hit as hard as other parts of California, there are many opportunities for house flipping here. Have you seen any new construction in the SF Bay Area? Well, loan applications have tripled in the past few months so that means there are many buyers out there. Simple supply and demand. A person can acquire quite a bit of skills in life. Maybe you helped your mother and/or father install some cabinets. Or you helped your neighbor lay some tile. Regardless of the source of where you learned the skill, you are now ready to use the skill in your own home. Great! The following are steps to consider in your home remodel/addition. Do Some ResearchLearning from others mistakes is better then learning from your own. Find out what problems other people ran into when doing a home remodel/addition. Develop A BudgetIn addition to the obvious, be sure to allocate an amount in the budget for contingencies. For example, a certain supplier of material does not have it in stock; you might have to pay a little extra somewhere else. It can work the other way too. Maybe you could rent a tool instead of buying one. Create A Rough DesignThis is not a formal design. It can be on a napkin if you like but it is probably better to put it on writing paper. Remember to discuss the design with all stakeholders involved! Determine If The Home Remodel Or Addition Is Exempt From A PermitGo to your local building departments website. Look for a link that is titled “Work Exempt from a Permit”. The link should be in the main web page for building permits. This portion of the web site will define a scope of work that does not require a permit. If the scope of work that you are planning meets the scope of work defined in this section, then you might not need a permit. Before you make a determination that you do not need a permit, I suggest you confirm your determination with the local building department by either giving them a call or going to the office. Prepare Construction DrawingsThis is one of the reasons that the title of this article is almost do it yourself home remodel/addition. Unless you are familiar with the local building codes and know how to prepare construction drawings, I suggest you hire an architect. There are a number of companies in the market that provide this service. For house remodels/additions, you will need “as-built” plans and “construction drawings”. Please note that in regards to the “as-built” plans, depending upon the size of the remodel/addition, only part of the house may need to be drafted. Recalculate Budget Based Upon The Construction DrawingsOnce the construction drawings are complete, the costs for the project can be calculated in detail. This is a good point to determine if you are going to be under or over budget. The completed construction drawings are submitted to the local building department for building permit approval and to banks, if a construction loan is being used to finance the project. Once the plans are approved by the local building department construction can begin. Consideration For Electrical WorkThis is another reason why the title for this article is “Almost do it yourself house remodel/addition”. Unless you are very skilled in electrical work, it is suggested that you hire an electrician. InspectionsTo verify compliance with the requirements of the various building codes, an inspection of the work authorized by a permit is required at various points during construction. Go to your local building departments website and look under inspections in order to determine at which point of construction an inspection is required for your specific project. Comments Regarding Permit CostsThe building permit fees generally increase as the total project costs increase. Inspections generally charge according to a minimum fee and hourly rate and these costs are in addition to the building permit fees. ConclusionThe above steps are not exhaustive list. I have been in real estate since 2003
and I have seen some project scopes of work that cover 20 pages or more. However, the above steps provide a good framework that will lead to successful home remodel/addition. |
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