Lately my phone has been ringing off the hook with some of my past clients wanting my expert opinion on whether or not they should refinance their homes. While I am happy to speak with my clients and help them flesh out a plan that works best for them, it made me start thinking...should they be considering selling and moving up instead of refinancing? The answer in quite a few instances was a resounding YES.
While each individual's circumstances are unique the factors that should be considered when making the refi vs. buy decision on the same:
1. How much equity do you need to have in your current home to refinance?
The rule (though not an exact number) is you need to have at least 15% equity in your home to do a rate and term refinance. A rate and term refinance is applicable if you just want to change the terms on your existing balance - switch from an adjustable-rate mortgage to a fixed-rate, for instance, or go from a 30-year term to a 40-year.
1a. How much equity do you need to have in your current home to buy? T
That answer will depend a good bit on what price range you would be moving into. If your new home would fall under the FHA limits than your down payment will 3.5% of sales price. You must also take into consideration the cost associated with selling your current home, assuming that you are using the services of a REALTOR to market your current home you must factor in the commission and other seller fees. All commissions are negotiable so it is not possible to give an exact figure here however, the seller's cost typically run between 6%-7% after all fees are added. I am not factoring in the closing cost affiliated with buying the new home because given the current market conditions I have had much success with negotiating the seller paying the buyer's closing costs.
RECAP: How much equity do you need in your currnet home to refinance? At least 15%
How much equity do you need in your current home to buy? At least 9.5%
2. What is the cost affiliated with refinancing your home and how long will it take to recoup those cost?
Refinance loans have many of the same closing costs as your original home loan. The only break most borrowers may be eligible for is a reduction in the attorney's fee if you close your refinance with the same firm that closed your original loan. While closing cost will vary from lender to lender the average closing costs/prepaids for a $200,000 loan without PMI is approximately $8,000.
If there is enough equity in your home above and beyond the 15%-20% that you must have to refinance you may be eligible to "roll" your closing cost back into your loan so you will not have to write a check at the closing. BEWARE.. if you do this you need to figure out how long it will take you to recoup these cost. The average time to recoup the $8,000 closing cost with a new rate of 5% is 52 months. You need to look at you and your family's long term plan if you are not planning on staying in the home the amount of time necessary to recoup the cost, then the rate saving may not make sense. This is a great calculator that will allow you to tailor the numbers to your individual situation and see how long it will take you to recoup the closing cost.
2a. What is the cost affiliated with purchasing a home and how long will it take to recoup those cost?
As stated above, the closing cost/prepaids will be approximately the same as a refinance. One of the advantages of a somewhat slower market is I have been very successful in negotiating the seller to pay most if not all of the closing cost/prepaids. It goes with out saying that in that instance the recoup time is 0 months.
RECAP: What is the cost affillated with refinancing your home and how long will take to recoup those cost? The cost if the same as a purchase and depending on your individual situation the average time to recoup is 52 months.
What is the cost affiliated with purchasing a home and how long will it take to recoup those cost?The cost is the same as a refi and with negotiation your recoup time can be 0 months
Right now is a great time to buy a home the Greater Baton Rouge area. Our market is strong, interest rates are great and there is a good inventory to chose from. While every ones situation is unique and refinancing may be the best path for you at this time, it would behoove you to give Shannon Sims a call before you make that decision. It may be the perfect time for you to buy that larger home with same or similar note that you are paying now.
For more information on homes in the Greater Baton Rouge area please call Shannon Sims at (225)767-1999 or email Shannon at shannon@judyburkett.com
