Zombie Homeowners Can Move UP instead of OUT
The long nightmare of the great recession and housing crash from which we are just emerging has created a new class of home- owner, the walking dead, zombie homeowners. Unlike your traditional zombies they seek something far different from brains, they are searching for options.
In Q1 of 2013 it was reported by Zillow that 25.4% of homeowners were underwater and that 18.2% were considered to be “effectively underwater”. The latter meaning that they did not have enough equity to sell AND to pay agent commissions.
That puts the number of American homeowners that don’t have enough equity to pay for a move at more than 22 MILLION. That’s a lot of zombies.
Seemingly stuck in their post-apocalyptic nightmare, many zombie home-owners think they are stuck in their homes as well. Spurning general deferred maintenance because they didn’t want to sink more money in a already sunk asset, they live in homes that long for repair or that no longer meet their family / personal needs.
Many Baby Boomers want to downsize now that their children have left the nest. Some families got bigger and have outgrown their current homes. Divorce, death and job changes all spur the need to upgrade or downsize as well.
Sun shines through the clouds though, the market has turned and equity has been regained by millions of home-owners across the US. Especially those in California where prices have risen as much as 5-10% a month in Q2 2013.
Despite the recent appreciation, many home-owners still have a ways to go before they can afford the agent commissions on a sale, moving truck expenses and new down payment that is associated with buying a new home.
Renovation Refinances – Move Up Without Moving Out
Home-owners generally associate money to renovate with the traditional cash-out refinance where you pull equity from the home based on its current value. For NO or LOW equity borrowers that means they have no room in which to operate.
On a renovation refinance we lend based on the AS-COMPLETED or AFTER REPAIR VALUE instead of the current value. We’ll provide the appraiser with the proposed scope of work and they’ll consider that when they value the home. Let’s look at a hypothetical borrower, Rick Grimes, to illustrate.
Rick owes $250,000 on his 3 bedroom, 2 bath home in Atlanta. Rick and his wife Lori are having a new baby soon and they need more space. They estimate $40,000 to convert the attic into a new bedroom. However, their house just appraised at $280,000 and both FHA and Conventional guidelines limit a cash-out refinance to 85% loan to value. Rick’s cash-out refinance is walking dead right? Yes AND no.
Rate/term refinances have a loan to value cap of around 95% depending on what type of loan you are getting. Not only are renovation refinances based on the “after repair” value, but they are also consider to be rate / term and NOT cash-out. Let’s look at the numbers now.
- Current Mortgage = $250,000
- Renovations = $40,000
- New Mortgage Amount = $290,000
Since Rick and Lori are adding a bedroom they now have a 4/2 and the comparable sales show that those are selling for around $315,000.
- $315,000 x 95% LTV = $299,250
The Grimes family just figured out how to do a $40,000 renovation on a property that previously had $30,000 in equity. They were able to get their attic converted, add value to the property and avoided having to sell, buy and move. Just for further validation, let’s look at how much they saved on agent commissions from a potential sale and a moving truck.
$280,000 x 6% = $16,800 in saved agent commission + $5000 for the movers = $21,800 in savings.
Those are funds they can use to buy plenty of insurance for the inevitable ZOMBIE apocalypse.
Wondering if you can escape your zombie home? Contact us for all the info on how to qualify, what types of renovation loans are available and the next steps in moving UP without moving OUT.