By JLP | January 21, 2011
A friend sent me the following email, asking for my opinion:
Here is the situation:
I have my house that I would like to sell but with the market for selling house the way it is right now it has been difficult to get the amount that I would like to get out of it, which is 75,000. Currently I am at a fixed rate of 8% interest and balance is 65,700. I am seeing interest at 2.99% – 4%.
What I am wanting to know is or would it be better to refinance for the lower interest to reduce my payments and hold off on the sale of the house until the market picks back up or should I just list my house and try and sell with maybe taking less so that I can get out of it.
The only real pressing reason to sell the house is to move to be closer to my husband’s kids and my daughter entering high school (2012-13).
Does this make sense? I think the real confusion for me is seeing the interest rates being so low and a possible loss on house. I think that my realtor said that I would have to pay closing on my house if I sell and I thought she said that it would be 3.5% but I am not sure.
Let me know if this is thoroughly confusing.
Here was my response:
I’m thinking you should sell now and get what you can get for it. Unless…
• You can rent it out while you wait for prices to rebound. This strategy is not without risks. Renters don’t take care of property and a bad renter could leave you with a mess and lots of additional costs. A good renter, on the other hand, could make keeping the house a good idea.
• You think you can sell it for the price you want ($75,000) in one or two years. Using $65,700 as the baseline, to get to $75,000 in one year implies a return of 14%. If you can’t sell for two years, the “return” drops to 7% and to 5% if you can’t sell for 3 years.
Refinancing, due to closing costs, is only a good idea if you intent to keep the house for at least 5 years (that’s the general recommendation). If you decide to rent it out, then refinancing may not be a bad idea. According to my numbers, if you refinance the balance (plus rolling in 3% closing costs) at 4% for 25-years, your payment would be $357 per month (not including PMI, which you will probably need since you are financing 90% of the value of the house).
If you go the sales route, you’ll need to get $72,500 for the house in order to get enough to pay off your existing loan. I came to that number by taking $72,500 and deducting 9.5% for sales commissions and closing costs.
I hope this helps you in your decision making. Good luck.
Thoughts? Are you facing a similar situation? What’s your game plan?