It is no secret that Huntsville – and the US in general – has seen an increase in home valuation within the last two years. This is great for those looking to sell and homeowners that are looking to refinance. In Part 3 of our MortgageRight Moment we take a look at how refinancing can benefit you – from enhancing the diversification of your portfolio to giving you more funds to do home improvement.
A refinance scenario only minimally changes the decision calculus for Huntsville homeowners. The key
difference, obviously, is that you won’t have to sell your home, pay a realtor commission on that sale, or
find a new place to stay. Other than that, much of the benefits stay the same.
If you plan on remaining in your residence for the long haul or passing that home on to future
generations, you retain the ability to take advantage of the updated equity therein. Much like in the sale
scenario above, your mortgage payment will increase with the increased home values – but the net
effect will very likely remain in your favor.
Using the same data points above, suppose you decide to refinance your “forever home” and claim the
$133,024 in equity. Your new loan would be based on the updated appraised value of $264,000 but with
a better interest rate of 3.25% – one whole point less than before. To avoid PMI on your conventional
loan, you will have to put down $52,800 (20%) which reduces your loan amount to $211,200. The closing
costs and prepaid items would add up to approximately $7,800 – reducing your net proceeds to $72,424.
Assuming the same debt profile, paying off your vehicle loan, credit card debt, and unsecured loan debt
would reduce the net takeaway to $43,424. As in the sale example, you have effectively reduced your
overall monthly payment from $1,675 to $1,118 to cover the new mortgage payment. The result is
keeping $550 per month in your bank account, along with deciding what to do with over $40k – not a
bad problem to have!
What you do with that $43,424 can only be decided by you. Many financial advisors and wealth managers
would recommend using those proceeds to invest in stocks, bonds, funds, or currency markets. In a
recent online seminar with SavingFreak®, we asked the question: “how specifically would you invest
$40k?” The answer is provided below as solely an example:
- Charitable Giving – $4,000
- Betterment – $10,000
- Fundrise – $10,000
- Worthy Bonds – $5,000
- Savings – $1,000
- Mutual Funds – $5,000
- Ally Invest – $3,000
- Cryptocurrency – $2,000
To learn more about these opportunities and services, please visit https://savingfreak.com.
Aside from the empirical recommendations above, we did takeaway three important points that are
worth sharing. The foremost is that no matter which avenue you choose to invest, it is vital that you
understand your investments to a point where you are comfortable with each choice. Continuing to
educate yourself on investments and being ready to change your investing strategy when new options
are presented is critical. The second point is that the advent of online activity has promoted a
competitive trading system that will allow you to invest with minimal (or even zero) transactional costs
or fees. And finally, the key to successful investment is diversification of your portfolio – the age-old
axiom to not put all your eggs in one basket is just as true today as when the colloquialism was originated.
You might consider increasing the amount of the down payment to lower your monthly mortgage
payment, but many would argue that it takes a lot of extra down payment to move the needle. For
example, increasing your down payment to 30% would cost another $26,400 and would only decrease
your mortgage payment by about $100 per month.
Instead of spending that money on additional down payment, another option would be to make
improvements to the house. For generational homes, luxury upgrades like a pool, hardscaping, marble
countertops, and professional-grade appliances would be improvements that would be enjoyed for
many years. As Zillow points out, these upgrades do not considerably add value for a future sale (limited
ROI), as many Buyers will not pay extra for such amenities. But for homes that are intended to be kept
in the family, enjoying those luxury items is far more important than a perceived increase in value.
For those that do not desire to move out of their home, but would like to use funds from a refinance to
boost future value for a potential sale when the time is right, the $43,424 in net proceeds after paying
off debt could be used as followed for the optimal return on investment:
Of course, you would still have close to $5k leftover to bet against any overruns experienced along the
way. Anything left over could be added to a savings account or used for additional interior work like
repainting or new furniture. And according to the experts at Zillow, your newly equitized house would
grow in value from $264,000 to $292,756 while you get to enjoy the benefit of a fully revitalized exterior.
It really is fun to consider what you can do with an influx of funds by using the newly acquired equity in
your home that literally showed up overnight with little to no effort on your part. Sometimes we sit and
think about how “if I only had a few thousand dollars, I could do such and such.” While there’s no such
thing as a money tree, as mom and dad constantly reminded us, this is about as close as it gets. The
timing and circumstances behind our city’s growth have offered you a gift that most people will never
see in their lifetimes.
While we always encourage people to focus on debt management and improving their financial position
in general, we also understand that wealth is more than just the money in your bank account. Perhaps
finally taking your wife on that European cruise or your kids to a theme park will do more for your family’s
wellness than repainting the kitchen or building a deck. And that’s totally okay – it is up to you!
We have provided some scenarios that are based on expert opinions and local / national averages – of
course everyone’s situation is a little bit different, so the best course of action is to confer with both a
realtor and mortgage professional to visit your options. We are proud to offer our availability to you and
answer any questions that you may have – taking the first step only requires 5 seconds of your time.