Low mortgage refinance rates: Time to remodel?
Iris Price | Improvement Center Columnist | December 1, 2014
You waited out the recession on pins and needles, wondering whether housing prices would ever come back. Now with the housing market showing signs of improvement and mortgage refinance rates still low, you are itching to finally get started on that remodel you put on hold a few years ago. But how can you be certain this is the right time to invest in your home?
You can never be certain of anything but the proverbial death and taxes, but there are some indications that now is as good a time for remodeling as you've seen in quite some time.
Remodeling: What makes now a good time?
Remodeling Magazine reports every year on the ratio of remodeling costs to resale value. For 2014, the national average return on investment for each of the 35 remodeling projects they follow from year to year showed gains. The report notes, "This trend signals an end to the long slide in the cost-value ratio, which began to fall in 2006 and didn't begin to rebound until last year. For 2014, the cost-value ratio stands at 66.1%, a jump of 5.5 points over last year and the largest increase since 2005, when the ratio jumped 6.1 points to reach its high of 86.7%."
The National Association of Home Builders (NAHB) tracks contractors' confidence in the remodeling market through their Remodeling Market Index (RMI) survey. Any result over 50 is a very good sign, and the RMI has been over 50 for six quarters in a row. In fact, in the third quarter of 2014, it matched its all-time high for the second time in less than two years. NAHB bases the index on results from four measurable components that remodeling contractors report on their completed surveys:
- Calls for quotes
- Amount of work backlogged
- Committed work for next quarter
- Scheduled appointments for job estimates
If you've been waiting for the right time, the time is right now. The only real impediment that contractors report for completing work as scheduled is finding skilled workers to replace those who sought employment in other industries during the recession. A shortage of carpenters in some regions of the country may hold up certain projects, but on the other hand, waiting too long to contract for your project could further delay its completion.
Another consideration for contracting now is that framing lumber prices have dropped significantly after spiking in August and September 2014. If you have been waiting to put on a large addition, getting started sooner rather than later may keep the lid on building costs for a project of that size.
Mortgage refinance rates are still very low
All other factors aside, the economy may not be this favorable again in the foreseeable future for financing an investment in your home. October 2014 saw mortgage rates drop again. As of November 24, 2014, 30-year fixed mortgage rates were 4.06%. Employment figures look brighter than they've been in years, and the job market appears to be improving and stabilizing, all of which bodes well for mortgage-seekers.
With home prices once again trending upward, if you want to stay in your home and make the improvements you've been putting off, this is a good time to find out whether you can do a "cash out" refinance on your mortgage. Depending on the difference between what you owe on your current mortgage and the amount for which you qualify to refinance, you may be able to pull out enough cash to pay for your remodel and keep your monthly mortgage payments manageable. Here's are a few things to consider:
- How much would the remodel cost? Consult a contractor to get an idea of how expensive the scope of your project might be. Ask what it would cost if you trimmed the frills. Mid-range projects as opposed to upscale remodels often produce a better return on investment (ROI) when you sell your home, according to Remodeling Magazine.
- What is the expected ROI for your project? The Remodeling Magazine Cost vs. Value report also shows costs and ROI by region for typical remodel projects. Their findings can further inform your remodel plans, financing and investment decisions when you look at how much money you need to realize from a cash out refinanace.
- What kind of monthly mortgage payments can you afford? A mortgage lender can help you calculate how much you can afford to borrow so that your income is not stretched too far. This can help determine a budget for your remodel.
- What is your current equity in your home? Refinancing can require you have a professional appraisal, but before you get that far, you can find out the approximate current value of your home using various real estate appraisal websites. Subtract what you owe on your mortgage from your home's current value to estimate your equity.
A low-interest re-fi and favorable home appraisal can put remodeling within reach. Rising home resale prices make many remodeling projects worthwhile investments, and as with any investment, timing is key. Given the market conditions, now seems like as good a time as any, if not better.