Hammer Time?


This week I would like to talk about renovation loans as an option for homeowners with houses underwater.  The first thing most homeowners consider is how they can change the value of the house. 
Some homeowners reason that if they just were able to break even they could take advantage of this market rebound and sell the house and walk away.  But is that even a possibility?  When researching how to improve their house value many home owners consider indebting themselves even more with a loan for house renovations.  The Washington Post recently responded to a reader asking for advice selling his home.  The reader was wondering if he should take out another loan in order to renovate the house in an attempt to increase the house’s value.  He hoped to sell for what they owe on their note.  For those of you that do not know much about home improvements the article is clear, “you might be surprised to know that most home improvements do not result in a dollar- for- dollar increase in the home’s value.” 

There are times when making repairs to your home can be beneficial.  Imagine that your house has foundation issues or needs a new roof.  If you are not drastically underwater those repairs may seem worth it.  Possibly the best things to know before you make any decisions is what a house in perfect condition would sell for in your neighborhood.  If the brand new house at the end of your block would only sell for $200,000 and you owe $250,000, you are looking at an impossible task.  Why would you put yourself in more debt if you could never make your house sell for what you owe on the note? The article confirms this conclusion by providing a hypothetical scenario; “if you purchased your house in in 2007 and its value went down 40 percent, a 10 or 15 percent increase from the bottom still leaves you a long way from getting back to your purchase price.” 

Another thing to consider is that if you take out a loan to improve your house that new debt must be paid off when you sell the house. For example if your house is worth $150,000 and you owe $200,000, taking out a $50,000 now means your house must sell for $250,000.  If your house does not sell for at least $250,000 you will still be in debt when you sell the house.  Now then, taking out a renovation loan seems rather ridiculous correct?

Lastly, what does this have to do with short sales?  If you cannot do anything to increase the value of your home you have a few options: loan modification, short sale, or staying put. As we have covered before loan modifications are not an option for homeowners drastically underwater or for any homeowner in a permanent financial hardship.  The Washington Post also addresses that if doing a short sale is your option it is better to do it now rather than later.  It is hard to tell what the market might do in the next few months but for now it is a seller’s market; every buyer seems to have cash.  The sooner you start, the sooner you can repair your credit.


Please feel free to contact us for any further questions.

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