Pros and Cons of Remodeling Vs. Moving

June 18, 2019 by Comerica Bank

Almost all homeowners eventually face the question, "Does my property still satisfy my lifestyle?" If the answer is "no" – because your family is growing, the kids are moving out or you're just ready for something new – you need to ask a crucial follow-up: "Should I remodel my home, or should I move?"

Sometimes the answer is easy. If location is the problem, no amount of remodeling will suffice. However, the decision-making process is usually more involved. Homeowners need to consider personal factors such as how attached they are to the property and how long they could see themselves staying should they choose to remodel.

Practicality also weighs into this decision. What is the extent of the remodeling, the cost for those renovations, the amount of time it would take? How might it affect long-term property value, and do you have the capital on hand for remodeling?

As you deliberate, it helps to have all the information you need to make the right choice for your circumstances. That's why we've enumerated some pros and cons to help you make your decision.

Remodeling pros

Remodeling is ideal if you're happy with the school district, local amenities, property taxes and other locational factors. This means that if you're mainly interested in a kitchen with new counters and appliances, or a refurbished patio space, it's in your best interest to remodel your home rather than go through the trouble of putting it on the market and leaving the area you like. Both of these remodeling jobs in particular can yield significant returns on the value of the property.

Financially speaking, a home equity line of credit may make remodeling the more enticing option. A HELOC loan's value is determined by subtracting your existing mortgage from a percentage of your home's value. Presuming you have a healthy credit score (640 or higher) and debt-to-income ratio (the low 40s or less), a HELOC loan provides a revolving line of credit for a set period of time, usually 10 to 15 years, known as the draw period. The loan may have a fixed-rate payment option or a variable rate option. It’s important to closely assess both options, as a fixed-rate HELOC may be more consistent than a variable rate but can end up costing more in the long term since you pay for the additional convenience of an unchanging rate.

A HELOC loan for home improvement can also be applied to a more substantial remodeling effort (adding a new floor), and may also qualify you for tax deductions, according to Forbes®. Ideally, though, you would have enough equity to finance the whole project with a HELOC loan, as this will help lock in interest rates.

Remodeling cons

The most obvious con of remodeling is that it can also be disruptive since you are, in effect, living in a construction zone with workers possibly coming in and out depending on the extent of the project.

Remodeling can also be a financial liability. First, there's the possibility of an unexpected cost arising. This is not unusual, especially for larger-scale remodeling that uncovers previously unresolved issues. The other risk factor is "over-improving" your home. Real estate prices are affected by location, meaning you won't get full return on investment if your renovations are made in a neighborhood with mostly starter homes.

By comparison, remodeling a home to raise the value to match other homes in the neighborhood would likely yield higher return on investment. In other words, you don't necessarily want to put yourself in a position where you have the priciest home in the neighborhood, especially if you intend to eventually sell your house.

Moving pros

The most obvious benefit of moving over remodeling is that you don't have to deal with contractors or live in a construction zone for several months at a time. A new home is also the ideal option for a homeowner who is generally displeased with his or her location, whether it's because the school district leaves something to be desired or because they could use a change of scenery.

In some cases, selling a home with good equity may just be more financially beneficial than remodeling. Rather than borrowing against your equity, you may instead cash out by selling the property, and then use the money to move into a better home.

Another key benefit of moving is that if the home was recently constructed, it’s probably more energy efficient than an older property, which can save money on utilities. And, if the house is new or in good condition, additional spend on repairs may be minimal.

Moving cons

Ironically, the only thing more expensive and time-consuming than renovating your home is buying a new one. The costs of property are generally increasing, partly because nationwide housing inventory has been relatively low in the past year. This means it's harder and more expensive to find a home. Furthermore, because most homes sell quickly on the market today, the seller may not have very much time to make a decision when searching for a replacement home.

There's also no way around the fact that moving is expensive. Realtor fees (for buying and selling), relocation costs, renovations to make your existing property more marketable and countless other expenses add up fast. The process of buying and selling a home is also generally stressful. It demands time, money, patience, coordination and a willingness to act quickly to beat the competition, knowing well that you may end up in a house you actually like less than your old home. This doesn't factor in the emotional strain of moving, the possibility of a longer commute and other personal factors.

The bottom line

Due to generally low inventory and the fact that many American homeowners currently have equity, more people are choosing to remodel instead of move, according to MarketWatch®.

Remodeling spending as an alternative to moving is on the rise, and many of those projects, unsurprisingly, are financed with HELOC loans. Talk to a Comerica Bank lending expert today to learn more.

 

This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice.

This article is provided for informational purposes only. While the information contained within has been compiled from source[s] which are believed to be reliable and accurate, Comerica Bank does not guarantee its accuracy. Consequently, it should not be considered a comprehensive statement on any matter nor be relied upon as such.    

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Should I Pay Off My Mortgage Before I Retire?

June 11, 2019 by Comerica

Retiring mortgage-free sounds like a dream. On the surface, it seems like your biggest monthly expense is eliminated, liberating you to live a more carefree post-retirement life. 

That doesn't necessarily mean it's in your best interest to prioritize paying off the mortgage prior to retirement, though. Planning your post-retirement finances is a little more involved and, in some cases, it may make more sense to focus more on liquid retirement funds. The best option for you will depend mostly on your personal circumstances. Either way, this is a decision that will ideally be made well before retirement, since it will ultimately impact how you save your money. 

When to consider paying off your mortgage pre-retirement

How long you intend to stay in your current home is the most obvious consideration when deciding if you should pay off your mortgage. If you intend to stay at that location to be near family and friends – and to eventually pass on the property to your children – then it might make the most sense to focus more of your funds on paying off your mortgage. This is especially true if:

  • You have enough cash saved to cover the mortgage and still comfortably pay for the costs of living after retirement.
  • You will pass the property onto one of your children to make it their permanent place of residence, particularly if you intend to stay there and they have enough income to help support you post retirement.
  • You're relatively young and anticipate having ample time left in the workforce to build up savings for retirement.  

It's also worth noting that owner-occupied properties may receive a break on capital gains taxes. If you decide later in life that you would like to sell your property, either to downsize, to move in with family, to relocate to an assisted-living community or for some other reason, you can collect on the profits.

Reasons not to pay off your mortgage pre-retirement

The Federal Reserve Board estimates that a third of homeowners between the ages of 65 and 74 have an average balance of $118,000 on their mortgage, according to U.S. News & World Report®. Whether or not that's by design, several reasons exist for why homeowners might choose to keep their mortgage into retirement.

The first consideration is other sources of debt. The average rate for a new credit card is just under 17 percent, according to USA Today®. This is a little more than triple the average interest rate for a mortgage. Making extra payments toward mortgage debt is not necessarily prudent for anyone carrying high-interest loans.

Current retirement savings also represent a big consideration. Many people heading toward retirement will have money saved in an IRA, 401(k), 403(b) or other retirement-saving vehicle. This is cash that can later be used to pay bills, including your monthly mortgage payments, down the road. Retirees do not necessarily want to find themselves in a situation where they are asset-rich, but cash-poor. Ideally, they'll have access to money when they need it, for monthly budgets, but also for long-term care purposes, emergencies and for leisure.

Furthermore, paying off the mortgage in a lump sum prior to retirement comes with a few cons. First, accessing IRA, 401(k) and other retirement savings before the age of 59 and a half may come with a 10 percent tax penalty, according to CNBC®. Second, withdrawals from retirements savings are taxed like income. Consequently, a lump sum payment on the mortgage using retirement funds may step you up into a higher tax bracket, ultimately costing thousands of additional dollars in taxes, according to Investopedia®. By comparison, the interest paid on your mortgage is tax deductible as long as the value of the mortgage does not exceed $750,000.

The important thing is to ensure that paying off your mortgage early will not leave all your wealth tied up in your home, and that you're not paying more taxes than necessary.    

The verdict: Make a decision suited to your circumstances

There is no right or wrong answer to this question since every retiree will have a slightly different set of risks.

For instance, if the bulk of your post-retirement payments will go toward your mortgage anyway, it might be in your best interest to divert some of the money going into your retirement savings to your mortgage in the decade leading up to retirement. Refinancing your mortgage could be an option in this case if you want to increase your monthly payments.

Whatever route you choose, it's important to have a plan. Estimate your post-retirement monthly budget, figure out how many years of cash reserves you'll need to support your anticipated lifestyle and save accordingly. For more information about mortgages and personal finances, contact the experts at Comerica Bank.

 

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, compliance or accounting advice. You should consult your own tax, legal, compliance and accounting advisors before engaging in any transaction.

This article is provided for informational purposes only. While the information contained within has been compiled from source[s] which are believed to be reliable and accurate, Comerica Bank does not guarantee its accuracy. Consequently, it should not be considered a comprehensive statement on any matter nor be relied upon as such. 

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How to Save for a Down Payment for a House

May 21, 2019 by Comerica Bank

Saving money for a down payment on a house takes time and effort. More importantly, it requires smart financial decision-making in the years leading up to the payment. For better or worse, the actions you take now – or lack thereof – will affect your long-term homeownership goals.

First-time homebuyers may want to take the following steps toward saving for a down payment on their future house:

Pay down credit card debt and other loans

Debt plays a significant role in mortgage approval, and directly affects the size of your required down payment as well as your interest rates. In particular, lenders focus on two crucial factors related to debt:

  1. FICO® credit score:  Credit score is a significant factor that lenders review as an indicator of your credibility when it comes to obtaining a loan. The minimum requirement for a Federal Housing Administration® (FHA) loan is 580. Note that utility bills, student loans and other forms of debt also impact your credit score.
  2. Debt-to-income ratio: Debt-to-income ratio is a measure of your amount of monthly debt against your income. Any form of monthly payment weighs into this, including bills and loans, but also minimum credit card payments. Some lenders will allow a maximum debt ratio of up to 43 percent, but the ideal for anyone seeking a home loan is 36 percent or lower, according to SmartAsset®.

Credit reports typically reflect payment history from the prior 24 months, according to The Balance®. A prospective homeowner will ideally have a clean slate for the two years leading up to a home loan application. Either way, your ability to pay bills on time will reflect in your credit score and, in turn, the percentage of your down payment and interest rates.

Credit reports also provide a glance at your credit utilization, which is the ratio of your credit card balances to credit limits. Paying off your credit card debt brings down your credit utilization rate, which improves a credit score while ultimately bringing down your debt-to-income ratio.

Have a realistic timeline

Money that goes toward debts is technically money saved since it improves your net worth. This is presuming you pay off debt faster than you amass it.

A down payment requires an upfront cash commitment, however. It's rare, and highly inadvisable according to NerdWallet®, to use a credit card toward a down payment on a house.

Accordingly, a realistic timeline for your future home will need to factor in your ability to pay off debt while also putting money aside for the down payment. If it's a choice between one or the other, paying off existing debts tends be seen as the priority. If you're currently in debt or don't have much in savings, then it may be in your best interest to push back your timeline a few years to save money for a larger down payment with better rates.

Assess existing mortgage options

The specific amount of money you need to set aside will depend on the price of the home you're looking for, but also the type of mortgage. Two of the most common mortgages for first-time homebuyers include:

  • FHA mortgage: With a 3.5 percent down payment and a minimum required credit score of 580, this option appeals to first-time homebuyers that lack substantial savings for a conventional mortgage.
  • Conventional mortgage: These non-government loans typically have down payments ranging anywhere between 5 percent and 20 percent.

Most mortgages with a down payment of less than 20 percent require private mortgage insurance (PMI). On average, this costs borrowers 0.5 percent to 1 percent of the full loan amount on an annual basis, according to Investopedia®. Home loans with smaller down payments may also come with higher interest rates. You may be able to refinance a mortgage down the line for better rates, but it's worth remembering that paying less now may mean paying more later.

For more information about down payments, or first-time home buying in general, contact the experts at Comerica Bank.

 

This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice.

This article is provided for informational purposes only. While the information contained within has been compiled from source[s] which are believed to be reliable and accurate, Comerica Bank does not guarantee its accuracy. Consequently, it should not be considered a comprehensive statement on any matter nor be relied upon as such.    

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Planning a Home Budget

March 20, 2019 by Comerica Bank

Planning a home budget is among the most important steps any homeowner or family needs to take to ensure their financial health. It can be easy to think you can get by without this step. However, the fact of the matter is when you don't have concrete means to tracking your monthly cash inflows and outflows, spending can get out of hand.

Sitting down to plan your home budget can seem like an intimidating experience. Some even avoid the practice because they don't want to look at the hard numbers. Yet there's no two ways around it: home budget planning is an essential task. Not only is a budget central to the day-to-day and month-to-month financial well-being of your family, but it also matters down the road. Trying to start a college savings fund? Looking to secure your retirement? Home budget planning and long-term financial management go hand in hand.

4 steps to crafting a budget

Though a budget may seem like an intensive exercise, it's not all that complex. Planning your home budget can be accomplished in four steps. All you need to do is come ready with the facts and figures:

  1. Add up your monthly income: Your budget starts with what you earn on a monthly basis. If you combine income with a spouse or significant other, then make sure to reflect that in the budget. Leave no source of income out of the equation so you have the fullest picture of your financial situation.
  2. Subtract monthly expenses: Identify all or your fixed monthly costs. Be sure not to omit anything at this step: monthly debt payments, expected credit card payments, mortgage payments, utilities, food and drink, household goods, living essentials, soccer team dues, car insurance, retirement contributions - all of it matters. Not only is this comprehensive accounting important to the numbers but also to your overall understanding of where your money goes.
  3. Factor in discretionary spending: After deducting monthly expenses, continue to subtract your discretionary spending. This refers to all the other extras you might spend on, like dining and ordering out or entertainment. Discretionary spending has a habit of sneaking up on consumers, ballooning by the month's end if unchecked.
  4. Make your adjustments: If you have leftover money, good, that can be put toward savings or debt; if your figure is negative, it's time to make changes. If in the latter camp, start with adjusting your discretionary spending. Cutting back on takeout can save a lot more than you might think. Also, consider your monthly expenses: Would a smart thermostat help control energy costs? Can you consolidate debt or refinance student loans? Even if you're in the black, planning a monthly budget can clue you into new areas where you can save.

How home budget planning is linked to long-term financial management

Budgets have evident use in the near-term. Segmenting your spending categories while planning a home budget gives you precise insight into your financial health. However, it is important not to forget their value outside the immediate time frame, as your long-term financial goals and objectives are all part of the same budgeting conversation. 

While long-term financial planning is undoubtedly different from home budget planning, there are intersections between the two. For instance, it helps to know what monthly retirement account contributions you make as you plan out the golden years and what you will need to live comfortably. If you need to increase those amounts, finding ways to trim discretionary spending through a home budget plan is a simple way to prioritize long-term goals. When you have a home and family to look after, the links between near-term budgeting and long-term financial well-being are clear.

The same workflow can be applied to any type of savings families want to increase or establish. Emergency funds are necessary to maintain, but often at the very end of the considerations list. College may seem incredibly far down the road, but wait too long to start saving and challenges arise. When you have a full picture of your current finances and your future goals, you can more easily marry the two: And it all starts with planning a home budget.

If you are looking for professional help to align your spending and financial means, as well as plan for long-term goals, talk to Comerica Bank today. Getting further personal financial advice can help you make the most of your budget. When you are saving to apply for a mortgage or another type of loan, there is no greater benefit than knowing how it factors into your monthly spending. Start your home budget today, and consider contacting us for more information on how we can help plan your personal finances in other ways.

 

 

This information is provided for general awareness purposes only and is not intended to be relied upon as legal orcompliance advice. 

This article is provided for informational purposes only. While the information contained within has been compiled from source[s] which are believed to be reliable and accurate, Comerica Bank does not guarantee its accuracy. Consequently, it should not be considered a comprehensive statement on any matter nor be relied upon as such.

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Renting Vs. Selling a Home: Which is Right for Your Property?

March 18, 2019 by Comerica Bank

A day may arrive when you find yourself having to choose between renting and selling your current property; for example, you might need to temporarily or permanently relocate for employment purposes. In this situation, renting out your property is not necessarily preferable to selling it, and vice versa. Rather, the optimal choice for your current property will depend on various factors that we explore in this post. 

Your future housing plans

Homeowners who leave town altogether typically opt to sell their home rather than rent it out. This is especially true for homeowners whose only reason to return to the city or town they leave behind is to check on the property.

Homeowners leaving the property for a few years with the intent of returning, on the other hand, may be more inclined to rent that property out to cover the mortgage cost until they return. This option appeals particularly to homeowners who feel attached to the property or the location. The only hitch is that homeowners in this category will need to act as a landlord in the interim or hire a property manager. The former can be a time-consuming process, while the latter can be expensive. 

Considerations for selling 

Homeowners interested in selling their home usually start by calculating the amount they need to pay on their current loan compared to the current value of the house. Profits made on the purchase price will ideally be enough to cover the loan balance while leaving some money left over to fund the move and, if applicable, finance a down payment for a new property.

If you're in a difficult market, or have a new loan subject to prepayment penalties, you aren't necessarily stuck in that house. It may be worth exploring a land contract, which is a common path to "rent-to-own" a home. This is where a homebuyer who is unable to secure financing through traditional means provides the seller (you) with a down payment on the house and then pays monthly rent. The seller may apply that rental income toward paying off an existing loan on the house. Either way, that rent gradually increases the buyer's equity in the home.

Sellers may want to look into rent-to-own because it widens the scope of potential buyers and gives homeowners who feel stuck in a tough market a means to sell their property. Should the buyer back out, the seller keeps the down payment and any rental income, meaning it's a relatively low-risk affair for sellers.

Considerations for renting

Homeowners may choose to rent out their current property for several reasons, including: 

  1. With the intent of eventually returning to the house.
  2. To continue paying off the mortgage with the long-term goal of rental income and eventually profiting from capital gains.

Renters who intend to return to their property can continue paying off their mortgage and possibly profit from rental income in the time spent away from their property. The extent of those profits depends on the price-to-rent ratio. A low price-to-rent ratio means it's cheaper to buy than to rent in that area, so there's a good chance the rental income will yield a profit. A high price-to-rent ratio means that it is more expensive to own than to rent, which will yield narrower cash flows. These metrics can be useful for rental property owners, but it's also important to consider the market (e.g., is there actually any demand to rent in that area?).

The same price-to-rent rules apply to homeowners who decide to treat their current house like a permanent rental property. The main difference is that an investment property will be subject to capital gains taxes on the sale. 

The bottom line

The decision to rent or sell your current property depends predominantly on your priorities, such as whether you're attempting to find, or retain, the home of your dreams, or profit from an investment property. Contact Comerica Bank to begin discussing your options.

 

This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice.

This article is provided for informational purposes only. While the information contained within has been compiled from source[s] which are believed to be reliable and accurate, Comerica Bank does not guarantee its accuracy. Consequently, it should not be considered a comprehensive statement on any matter nor be relied upon as such.   

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