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Real Estate Do's and Don'ts for 2017

January 4th, 2017 5:07 AM by Jackie A. Graves, President

Although 2016 has been a relatively quiet year for residential real estate, 2017 is going to prove interesting. For some, it'll be decision-making time.

For starters, if you've been meaning to pull the trigger on a refinancing move, 2017 may be the time to do it. Mortgage rates, as of this writing, have hit levels not seen in two years.

The Federal Reserve, after notching short-term rates up one-quarter point on Dec. 14, is eyeing more rate hikes in 2017, meaning mortgage rates will also likely climb further.

Similarly, if you've been on the fence about a purchase or sale, 2017 may also be a good time to "do." If the U.S. economy continues to heat up, that usually translates into higher demand for credit, with rates typically heading north.

Let's take a look at some other possible real-estate-related decisions to make for 2017, and whether they are do's or don'ts.

Refinance 

Don't just look at your monthly payment when making a decision about whether or not to refinance. According to Tim Steffen, director of financial planning for Baird in Milwaukee, you need to look at other factors. Every refinancing move involves closing costs, which could consume thousands of dollars--unless you choose to "roll in" those charges into the principal of your refinanced loan balance.

"You need to be in your home long enough for this to make sense," Steffen says. "Say you pay $1,000 for closing costs and you're saving $100 a month on the new (lower) payment. You'd need to be in your home at least 10 months. Refinancing is not a good idea for those selling soon."

Bottom line: Do refinance, if you'll be in your home long enough to overcome closing costs.

Refinance with a Fixed-Rate or Adjustable-Rate Mortgage

With adjustable-rate mortgages, there's always a trade-off. You get some of the lowest rates around up front, but your rate will reset after a period of time. That means your payment could rise quite a bit.

A five-year ARM, for example, averaged 3.45% at this writing, compared to a 4.15% rate for a 30-year, fixed-rate loan, according to bankrate.com. Don't want to take the risk of your rate climbing in an ARM? Consider a 15-year mortgage, which was averaging 3.4%. You would pay off the loan sooner and pay less total interest. Of course, your monthly payment would be higher than it would be with a 30-year mortgage.

No matter which financing option you choose, know how much you will pay over time. And understand how your mortgage works. Steffen, who once had an adjustable-rate mortgage himself, said: "I refinanced out of the ARM before the lower rate expired so I could still lock in a good rate and avoid the increase tied to the ARM. I may have given up something on ARM rate for a bit, but I locked in a better long-term rate."

Keep in mind that in a rising-rate environment--the Fed says three more rate hikes may be looming in the year ahead--that ARMs can be hazardous. The interest-rate index to which they are tied will reflect short-term interest rates, so your monthly payments can rise quickly.

The best candidates for ARMs are homeowners who know they will not be in a property very long, meaning only a few years. Are you going to be transferred or relocate soon? Always look at when an ARM will reset to determine which one will work for you. If you want to lock in a rate, as noted above, a 15-year fixed-rate mortgage will offer you the lowest interest cost.

Bottom line: For most, an ARM isn't a good idea in a rising-rate environment.

Relocate to Save Money

Don't make a move just based on one financial consideration; you need to look at the entire picture. Sure, lower (or no) state income taxes are a draw, but you may be socked with other taxes that are higher on property or sales.

When considering relocation, what you want to know is the total local cost of living. Sunbelt states may have little or no income taxes, but they may have higher sales taxes on goods and services. Run the bankrate.com cost-of-living calculator to see how much you would gain or lose in your area of choice. While homes may be cheaper, other common items might cost more. The question is how far your income goes based on local living expenses.

Bottom line: Only do once you have a full picture of the financial ramifications of relocating.

Consider Long-Term Care Costs in Your Relocation Decision

No one likes to think about long-term care when considering a move--but it's a must. What happens if you or your spouse becomes disabled and can't live at home? You may have to sell your home and go into assisted living or memory care. Unless you move back to where you moved away from, once again you have to consider the local costs of long-term care.

A year of assisted living care, on average, costs $45,000 a year, according to Redfin, the real estate service. Full-blown nursing cost could easily cost twice that much. If you didn't have any other assets, would you be able to afford local long-term care with a home sale? It largely depends upon where you're living at the time. In places where property prices are relatively high, such the San Francisco Bay area, Southern California, or Seattle, you could afford from 13 to 22 years in various long-term care settings if you sold your home there, a Redfin survey found.

Your money would go a lot less further in places like Detroit, Atlantic City, or Rockford, Illinois, where the range of care coverage is from one to three years. If you're looking to move in retirement, look down the road and ask how much it will cost to live outside the home, and would you have the assets to cover the total costs?

Bottom line: Do consider your long-term care options when deciding to relocate. For more on the subject, click here.

Take Out a Reverse Mortgage 

If you're 62 or older and own your home, you can tap equity via a reverse mortgage. Instead of you owing the bank, you get a check every month. But these vehicles, which carry federal insurance, are complex. The bank may own your home after you die. You need to understand how they work. And if you plan to move soon, they make little or no sense.

"Reverse mortgages are a pretty attractive thing to consider," notes Steffen. "But understand your options. Don't do it if you're going to be selling soon." To understand reverse mortgages, see Wade Pfau's book, Reverse Mortgages (Retirement Research Media, 2016).  You can also read more about them here.

Bottom line: Do only if you completely understand the ins and outs of these mortgages, and if you have no plans to move anytime soon.

Give Up Home Ownership

I know this is a heretical idea for most Americans. Of course you want to own your home! But that may not be practical if you can no longer maintain it, get swamped by property taxes, or want to sample another area.

Want to relocate? You may even want to rent--and not buy--before you make a final decision. Yet don't make a decision based on a need to own. Real estate in many places won't go up in value; it may be an even worse investment when you subtract the costs of ownership. Moreover, Steffen tells his clients not to see homes as assets in their financial plan.

"A primary residence is not a financial asset," Steffen says. "Don't go into a home purchase thinking solely about the investment opportunity. It's a lifestyle choice first, and any investment opportunity should be a secondary thought."

For more about the rent versus buy debate, click here.

Bottom line: The "Do" or "Don't" here will of course vary. But do keep an open mind to the idea of no longer owning a home; it may make sense for you at some point to rent instead.

The best real estate decisions in the coming year will turn on what works best for you. If you want to be closer to the people and things you love, that may override any financial reasons.

Whatever route you take, "make sure it fits with what you want to accomplish," Steffen adds. That way you're looking at your family's big picture and not one decision in isolation.

By John Wasik - To view the original article click here

Posted by Jackie A. Graves, President on January 4th, 2017 5:07 AM

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