Smart Moves For Real Estate Owners in Turbulent Times...
by John Adams, Copyright 2008.
Recent gyrations on Wall Street and beyond have muddied the financial waters. It’s hard to know just what to do or how to react. And if your largest investment is your home, your course is even less clear.
Here are several moves that I believe are rational and appropriate for the homeowner in today’s economic times:
1. Take a deep breath and relax. Because that is exactly what the Georgia housing market has done.
Over the years, residential real estate has proven to be one of the safest of all investments. And all the predictions of dramatic drops in home values in Georgia have been wrong. While there are some parts of the country where home values have taken a dive, Georgia is not one of them, according to federal regulators at OFHEO.gov.
On average, home prices in Georgia are higher today than ever before. And although appreciation has taken a year off, we have yet to see any decline in average home prices on a year-over-year basis. So it’s OK just to relax.
2. Now is a great time to consolidate your debt and refinance your home loan.
If you carry a balance on credit cards, or you carry a balance on a home equity line of credit, or you owe on a car loan or any type of consumer loan, you may be better off paying these balances to zero and loading up your house with debt.
Rates are low, and the interest may be tax-deductible, lowering your overall interest expense even more. This may be your chance to get a fresh start.
3. If you do refinance, make sure you select a thirty-year fixed-rate loan.
I used to tell clients that it was OK to select a 3 or 5 year ARM if they were sure they were moving from Atlanta within that time period. But I found out that many were so happy living in our fair city that they refused to relocate at the appointed hour, finding a way to stay here. I am persuaded that rates will be higher in years ahead, and those who lock in a low fixed rate today will be glad they did. In addition, if rates happen to go lower, you can always refinance again, although I believe this to be the bottom.
When the stock market stumbles, billions flow from equities to bonds, driving down mortgage rates. When the market recovers, and it will, look for a reverse flow and rates to tick upward.
4. Stop paying extra principal on your home loan, at least temporarily.
If you are one of the financial fundamentalists who oppose all debt, I encourage you to consider this: borrowing against your home is likely the cheapest source of cash you can get, and cash may be king in the months and years ahead.
In my view, if you have extra cash monthly to apply to home loan balances, you are better off to put it in a FDIC insured high yield CD and save it for a rainy day. If you pay it to the mortgage company, it doesn’t lower your monthly payments, and it may be difficult to get it back if you need it.
I know that debt can be dangerous, but it can also be used to improve our lives. In this regard it’s like electricity. We all know that there is danger in the electric socket, yet we tolerate the danger for the benefits it brings us. In addition, your house neither knows or cares that you have a mortgage balance against it.
5. After you have finished refinancing, look for a Home Equity Line of Credit.
In fact, you may be wise to not only put the HELOC in place. It may benefit you to also draw the full balance out, and put that cash in a safe place as well.
This may also prove to be good advice if you have a home equity line with a zero balance. There are disturbing reports of major lenders who are notifying borrowers of seldom-used HELOCs that their lines of credit have ben canceled. This is a bank reaction to perceived lower values for their collateral.
In addition, if you have a line of credit buy rarely use it, the bank probably loses money on your account. Drawing your line out assures you that the bank won’t unexpectedly close the account, and puts you in a stronger cash position.
As with all money moves, it’s smart to discuss them in advance with your financial advisor. Next week, several more ideas for homeowners in today’s market.
This article first appeared in the Atlanta Journal-Constitution.