As interest rates fell last week (and with talk of Fed rate cuts coming in September), I talked with two clients about real estate related questions this week. Let’s take a look at these important topics

Selling a Home

Without a doubt, lower mortgage rates spark increased home buying (and selling) activity. As rates come down, individuals are able to afford “more house” as monthly mortgage payments decline as rates do the same.

A client reached out this week to say he and his wife had reached the decision to sell their home. They will rent moving forward so repurchase considerations are not a factor. He asked what to be aware of when selling. A few things we discussed (that may be helpful if you are in a similar position)

*Capital gains – a home is an asset, so when you sell it, capital gains may come into play along with potential taxation (just as they would with any other asset sale). Fortunately, in an effort to promote home ownership and wealth creation by that very action, the US tax code has some generous provisions in this regard. Each individual receives $250,000 exemption on capital gains from the sale of your primary residence (so $500,000 for a jointly owned home). Keep in mind the cost basis of your home should also be adjusted over time for any capital improvements (such as a renovation, new roof, etc) when calculating your ultimate capital gain

*Home equity line – keep in mind that a home equity line is a second mortgage on your home. If you sell the home, that debt, along with a first mortgage, must be repaid from the sale proceeds. You won’t be able to carry-over any debt secured against your home once it’s sold. If you were to purchase another home, you could reopen a new line for emergency cash access. However, if you end up renting like my client, you will no longer have this option

*Rate reset – while my client is not looking to purchase a new home (and therefore won’t need to worry about a subsequent mortgage), for many people, this is an important item of consideration. If you purchased a home – or refinanced an existing mortgage – during the COVID/low rate years, you are likely looking at least a 3% (if not more) rate increase on your next mortgage. Keep this in mind as you evaluate “how much house” you can afford and whether you will be able to come out ahead (or break even) on a move at this time. I fully realize there are qualitative reasons for moving (beyond the quantitative ones) but again, it’s something to be aware of as you make your decision

Refinancing a Mortgage

As rates came down, I had a client reach out about refinancing, namely when they should move forward with this step. They are not alone. Mortgage refinances surged 35% last week, as mortgage rates hit their lowest level in over a year. If you are holding a mortgage, it is always advisable that you know your rate (and term) and keep an eye on how it compares to prevailing mortgage rates. If you missed the historically low rates during the pandemic era, odds are you may soon reach a point when you will want to consider refinancing.

Refinancing is the act of replacing your current mortgage with a new one and altering the terms as you wish – not only the interest rate, but also the term and face value (known as a cash-out refi).

There are fees (and administrative work) associated with this process so you will want to do a cost vs. benefit analysis before moving forward. A simple calculation to run is the compare the refinance costs (your banker or mortgage broker can quantify this for you) versus the interest savings from the rate reduction. You can then figure out how long it will take you to recover your refinance costs in months/years.

For instance, assume this hypothetical example. Your refi costs will be $1,500. You have a $300,000 mortgage and your rate will fall 1% if you refinance today. That 1% differential equates to $3,000 – meaning you will recover your costs in half a year. If you plan to stay in your home for at least that long, refinancing will pay for itself.

This calculation is of course hugely dependent on the size of your mortgage and your current rate – so refinancing may not make sense for you even if others you know are talking about it. Always do the math for yourself!

Keep in mind you may refinance more than once – but you will of course pay fees each time. However, depending on the rate path, this can make sense. I had clients in COVID that refinanced three times during those years as rates kept falling and the “math” kept supporting the time and costs to refinance.

Hopefully these thoughts regarding key real estate and mortgage matters prove helpful if you are facing similar decisions!