A Question of Home Equity

Realty Q&A Minimum cash-out refinancing depends on your equity

Last Update: 7:48 PM ET Feb 22, 2007

WASHINGTON (MarketWatch) -- Question: What is the minimum amount of money that one can cash out without causing additional money to be refinanced within your loan amount? I have been informed that it is $2,000. Carnell Gadson.

Answer: The amount of cash you can take out of your house depends on the equity you have in it. And there are several ways to get at it. One is to take out a home-equity loan. Lenders usually will give you 75% to 80% of your equity, which is the difference between what your place is worth and what you owe on it.

You also might be able to get a little more with a second mortgage, which also is a tad more expensive than an equity loan. Or you can refinance the whole shooting match, which means turning in your old loan for a new, higher balance one and pocketing the difference between what you owe now and what you will owe on the new mortgage. Finally, you can sell the place and pocket the proceeds.

However, in the first three cases, we're talking about loans that must be paid back. Therefore, all three require that you take "additional money" out of your pocket every month. Even if you cash out $500 or $1,000, that amount will be added to your balance and your payment will increase.

Q: We are immigrants in our early 30s who came to this country with nothing in our pockets about eight years ago. My wife and I now currently own a two-bedroom condominium (House A) in downtown Chicago, which we bought for $360,000 in December 2004. We paid 5% down and got two loans, one 5-year adjustable rate mortgage at 4.625% and the other -- a line of credit -- at 1% plus prime.

We've been good with paying our bills on time and we also keep putting some extra money towards the principal every now and then. And thanks to the real estate market, the house has seen some appreciation, around 15%.

However, we now find this house rather small and are planning to buy a bigger house (House B) in downtown by early 2008. At the same time, we are thinking we should hold on to this house and use it as an investment property. Together we make about $200,000-$220,000 per year and have about $70,000 in savings, mutual funds and stocks. We do not have any major credit debt or any student loans to pay.

If we were to keep our total real estate portfolio between $900,000 and $1 million, which of the following options make more sense and why?

We keep House A, rent it out and buy House B. Or sell House A, use the profit from House A along with some savings for down payment on House B and use the equity from House A to buy and rent House C. House C will be smaller than House A (about $300,000, but still a two-bedroom condo) so we do not get too burdened if we are not able to rent it out for the entire year, which I am thinking will be the case. Or sell House A and use the money to buy House B. Gurneet Singh

A: Wow, that's a mouthful. For starters, you need to get with a knowledgeable investment and/or tax consultant, one who can look over your entire financial situation and make recommendations accordingly. There's just not enough information here for me to offer concrete suggestions.

That said, several things come to mind that you might want to consider. First, renting real estate isn't as easy as it seems. And you'll make most of your money from appreciation, not rent and write-offs. That begs the question, how long would you will be willing to hold Property A or Property C as rentals?

Also, what is the current rate of appreciation -- not in the Chicago market as a whole, but in the neighborhoods where the properties are located? Appreciation rates can change, of course. But for now, do the math to figure out whether your gains will be larger by owning one more expensive house or two less expensive places.

Another thing to consider is whether or not you have the stomach to be a landlord. Are you hard-nosed enough to kick someone out if they don't pay on time? Landlording is a tough-love business. You have to be stern but reasonable at the same time.

If you go it alone without hiring a professional property manager, can you give it the time necessary to collect the rent, pay the bills and keep on top of maintenance and repairs? If not, consider the cost of hiring a rental agent. In some markets, it rounds around 20% or so of the monthly rent. Can you give up one-fifth of your potential income and still make a go of it?
Also, can you afford to pay the bills if for some reason the house remains vacant longer than expected? Perhaps your search for a good tenant will take longer than you estimate? Or maybe it will take longer to fix up the place after a tenant leaves?

There also are transaction costs to consider in each of the scenarios you mention. Option One is the only one in which there is only one set; the others require two or perhaps even three rounds of closing costs.

It sounds like you have enough equity in House A that if you decide to sell, you have enough to make a healthy down payment and keep your payment reasonably close to what it is now. But you might be able to afford more now every month than you could when you bought the property. If you have two properties, can you charge enough on the rental property to make that payment without making it difficult to afford two house payments? And remember, there may be some down months when you have nothing coming in on the rental.

These are just some things to think about. Obviously, it is time for you to put pencil to paper and consider all the alternatives mathematically. And get some sound advice from someone who is familiar with your finances.

Feedback
Paul Beland from Bergen County, N.J., writes to note that I erred when I said federal income tax returns must be filed by April 15. See previous Realty Q&A.

While that is normally the date, when it falls on a weekend or holiday the deadline is extended to the next business day. That would be April 16, a Monday, this year. But as it turns out, that day is a holiday in some parts of the Northeast and in the District of Columbia. So for 2007 you actually have until Tuesday, April 17 to file your returns.

Nationally syndicated columnist Lew Sichelman has been covering the housing market for 35 years.

Planning a move? Consider these improvements before putting a house on the market

Planning a move?
Consider these improvements before putting a house on the market

By Amy Hoak, MarketWatch
Last Update: 8:01 PM ET Mar 15, 2007

CHICAGO (MarketWatch) -- The interior walls are neutral. The clutter is a distant memory. A shower door has been replaced and even the design of the bedspread has been factored in. The Green family's Chicago home also got a professional inspection and appraisal to limit any surprises down the road, said Dan Green. Now it is ready for sale.

"We're paving the road to make the closing process much smoother," Green said.

He has even created a blog, partly as a marketing tool for his Lincoln Park neighborhood home.

For some sellers, a little extra work can mean not only a difference in how smoothly the sale goes or how much they can ask for their home but also if they get to the closing table at all in an uncertain market.

"Talk to Realtors and they will tell you anything you do cosmetically to increase curb appeal is going to help the resale value," said Sal Alfano, editor of Remodeling magazine.

In addition, many home buyers stretch economically to get into a home, said David Lupberger, home-improvement expert for ServiceMagic.com, an online company that connects homeowners with screened home-service professionals. If a home has number of projects that will need to be addressed in the near future, a buyer might decide to pass it over.

"The last thing you want is a list of projects that has to be taken care of," Lupberger said.

Here's the bright spot: Many improvements that have an impact on selling a home aren't very expensive at all, said Jim Gillespie, president and CEO of Coldwell Banker. And some tasks, such as giving rooms a fresh coat of paint, quickly pay off.

Those planning on adding a "for sale" sign to the front lawn this spring might want to consider these five areas while creating their to-do list.

1. First impressions count

It's wise to make a good impression from the moment a potential buyer pulls up to the house, experts say. First glimpses of the home will include the home's exterior, the shrubbery, the gutters and the front door.

Peeling trim could be a kiss of death. Paint the exterior of the home in an odd color and you could lose their attention before they come inside. Don't underestimate the importance of good lawn care, either.

"A lawn that looks good on the outside gives the impression that someone cares about that home," said Trey Rogers, professor of turfgrass management at Michigan State University and author of "Lawn Geek," a book of tips on how to maintain a lawn.

His advice is "keep it green and keep it cut." Mow the lawn about three inches high at least twice a week when a home is on the market; two inches if the home is in a Southern state. The more it is mowed, the denser it will become. And get on a fertilization program, starting at the beginning of the season, he said.

Bypass store-bought sod and instead borrow some grass from an inconspicuous place elsewhere on the lawn if there are small spots that need to be filled in, Rogers said. The grasses will match better if they come from the same lawn.

Early birds selling at the tail end of winter should keep the sidewalks shoveled if there is snow on the ground.

2. Neutralize and declutter

When it comes to preparing a home's interior, any real-estate professional or stager worth their paycheck will advise a client to make a move to more neutral colors in a home.

"People can't visualize beyond what they see," Gillespie said. Neutral colors, including beige and ivory, can also have an added advantage of making a room appear larger -- an effect that Dan Green noticed right away when he repainted his bedroom walls.

Removing a home's clutter is also extremely important in getting potential buyers to imagine their family living in the home, Gillespie added.

Beyond that, do some basic spring cleaning: Shampoo the carpets, rebuff hardwood floors and oil any wood cabinetry, Lupberger said.

3. Consider replacement projects

Sellers might also consider having a home inspection done prior to listing the home as a way to detect any overdue replacement projects, Gillespie said.

A seller has the option of either fixing the problem or giving the buyer a discount to account for the needed repairs, but Gillespie is an advocate for making the necessary repairs before selling.

Home buyers recognize the value of a house that doesn't need major repairs, Alfano said.

"The house is probably not going to move, or you're not going to get all the value out it, if the new buyer knows they're going to have to replace the roof sometime soon," he said.

In fact, according to the 2006 "Cost vs. Value" report from "Remodeling" magazine, a roof replacement for a midrange home had an average cost of $14,276, and returned $10,553, or 73% at resale. A vinyl siding replacement had an average cost of $9,134, and returned $7,963, or 87% at resale, according to the report.

A wood window replacement in a midrange home had a national average cost of $11,040, and $9,416, or 85%, was recouped at resale. A vinyl window replacement had an average cost of $10,160 and returned $8,500, or 83%, at resale. See the full report.

4. Kitchens and bathrooms rule

It's no secret that buyers tend to be awed by updated kitchens and bathrooms.

"If the last time it was remodeled was in 1980, that's going to be points against versus another house that was upgraded even five years ago with sort of a modern look," Alfano said. "It's hard to go wrong with a kitchen or bath remodel unless you get a little too edgy with the design or the materials you use."

That said, a seller with less than a couple years to spend in a house probably isn't going to do a complete remodel of either room. Sellers should decide where these rooms need the most improvement, and then zero in on how much they want to spend, Lupberger said.

If kitchen cabinets are structurally fine but their exteriors are outdated, it might be worth it to reface them, Lupberger said. If counters are old, maybe replacing them will add new life to the room. In the bathroom, there are companies that will come in and resurface chipped and damaged bathtubs, he said.

5. Warranty coverage and documentation

Sellers can provide some extra peace of mind to buyers by purchasing a home warranty on their home that will cover such things as heating and plumbing should the buyer run into problems after closing. The coverage is getting a bit more popular nowadays, Gillespie said. Warranties can be bought from companies including American Home Shield and AON.

"Little things like that ... you need that today to set the property apart with all the competition out there," Gillespie said.

Gillespie also recommends displaying the age of the water heater and furnace; if either one is on the older side, have it inspected for proof that it works correctly.

And if replacement projects have been done in the past few years, dig out the documentation to prove it, Alfano said. Also, explain if any of the improvements have produced a cost savings in terms of energy usage.

"You never really could (miss), but it wasn't on the tip of everybody's tongue. Now, it's in the news all the time," Alfano said.

Amy Hoak is a MarketWatch reporter based in Chicago.