Your Trusted Real Estate Advisor

This email came from a client who is doing some repairs and updating on her home for an eventual move—but three to five years away because she sees the market as weak right now. She also had a question about what to do about her current loan.

“Rates - I spoke w/ countrywide, our lender and with our current 7 year ARM expiring 12/09, it sounded like we’d need to wait to see about a better either short term ( 5-7 year ARM) or get a 30 year fixed, even if we stayed in the house another 3-5 years???

Would appreciate your thoughts – thanks.”

My reply:

It sounds like you are on the right track. If you don’t have to move right now, it’s probably better for you to wait until the market shows definite signs that it’s starting back up.

My one caveat is that if you wait 3-5 years in order for the market for your home to be better, the market for your next home will have improved also. For example, right now it is possible to get a brand new home at a lower price than many resale homes in the same subdivision because the builders are hurting so much they are giving huge incentives. In 3 years those incentives will be gone and comparable new homes will be much more expensive. That 3-year old home which could be purchased today will have a lot of equity. In addition, resale homes that are 1-3 years old now will then be 4-6 years old. Your home will 31 years old, and won’t have appreciated as much.

Actually, I have a 2^nd caveat: although the market for selling your home is tough right now, the selection you would have as a buyer is extensive. With all you’ve done to your home, it would stand out from the crowd of competitors and go fairly quickly if priced right as well. Then you would have an opportunity to pick up your next home at a good price.

With your plans to stay in your current home longer, though, I’ll address your question about rates. You are on the right track here also. Since your current loan doesn’t adjust for another 15 months, you can afford to wait to get an even better loan at some low point in the roller-coaster ride of interest rates. Unless rates drop dramatically in the next few months, waiting probably will help, not hurt you. You’ve got time to wait for something good to come along.

If by this time next year you haven’t seen a good deal on rates come along, then start talking with a lender about refinancing. If at that time you still are thinking about moving within 2-4 years, either another ARM or even a 30-year loan would work, depending on what you can do with closing costs. The primary piece of advice I give clients about refinancing is to, in effect, amortize the closing costs of their refinance. Rather than focus on interest rates, work to get lower closing costs for the refinanced loan.

For example, if the new loan will have $4,800 in closing costs, and you will only save about $48 a month (approximate savings on a $150,000 loan with a drop from 6% to 5.5%), it will take 100 months to break even. Staying less than 8 years in the house after that kind of refinance just means you will have used some of your equity needlessly. So, if you do refinance, try to do it with no closing costs, even it if takes a premium interest rate to do it.

Long-winded, but I hope this helps.