Should You Remodel... or Move?

Good afternoon, everyone. Welcome to this week's Mortgage Minute. My name is Art Alvarez with MortgageWorks, where we have the answers and they're on the house. Coming to you from Palm Springs in the greater Coachella Valley area. Well, summer is definitely here now. I've been talking about how we've been having somewhat kind of cooler than normal, at least relatively speaking for our area temperatures over the last few weeks. Well, uh, that's over. In fact, today, uh, we're supposed to hit the what we call the one-teens. Last night on the news weather report, I was seeing we were supposed to hit 116 today. Although today I'm seeing that it's supposed to be— it's kind of moderated to 113, uh, so we'll see if we hit that. But also on the weather report, it said our humidity was only 12%, so that's, that's why we say it's a dry heat and why even in the 110s it can turn out to be more comfortable than what you hear from other parts of the country such as Texas, the Southeast, or back on the East Coast. So, uh, but we're used to it. It's not anything to be alarmed about. Yes, you have to take— be careful and and be, you know, take precautions given the heat levels. But we're used to it, we know how to deal with that. And the real reason that we're that hot is because it's called summertime, at least here in the Coachella Valley. Of course, we all have heard the disappointment about the U.S. team getting knocked out of the World Cup. They got the— oh, they pretty much got their butts kicked by Belgium 4-1. So that was disappointing, but they had a good run. And, uh, so we'll see how the rest of the World Cup plays out. It's interesting how once the U.S. got kicked out, I suddenly seem to have less interest in, you know, checking the scores and following up. But nonetheless, it's been a really exciting event. I think overall good for our country in, in the sense of us being able to host the event. Uh, so let's go ahead and move on today with what's going on in the mortgage and bond markets. We always like to start with giving you an idea where mortgage rates are. This week in particular, I think it's important to do that because earlier in the week, uh, we had some financial news suggesting that rates were ticking up again because, well, unfortunately, the, uh, memo of understanding, uh, I guess it's been called off. The deal with Iran was called off. The financial markets did not react well to that a couple of days ago. Stock market sold off by quite a bit and the bond yields jumped up. In fact, earlier in this week, uh, got close to, uh, 4.60. Hadn't seen that level in quite a while. But yet you look at our rate grid and things are not all that bad. I mean, it's old story, I've been saying it every week, at least here at MortgageWorks. We're in the mid, uh, actually more like the low to mid 6s. When you read the financial headlines, it'll— they'll suggest to you that rates, conforming conventional rates, are closer to 6.5, 6.58. Uh, but look at that. I mean, we're still 30-year fixed at 6.38%. You can still get those buydowns, 3.21%, 2.1%, and starting in the 3.38% or 4.38% range. FHA is still under 6%. Uh, VA is getting close to 6%. And of course, the, the jumbos have, uh, broke through the 6% barrier, 6.25%, but then the jumbo 7/1 ARM at 6%. So that's actually interestingly a little bit better than a conforming conventional rate. Which a lot of people don't, don't realize that that can be a case, the case with the jumbo loan. So Jeff's going to pull up now the chart of the 10-year bond yield, and there you can see it, uh, the kind of trend from last Friday we don't like to see. You know, you can see there last Friday we were down around 4.45 range, and then it's been gradually going up with the big uptick, uptick, and not the Wednesday dip that Jeff likes, but rather the Wednesday uptick. You know, climbing above 4.50%. And again, yesterday in particular, we were getting— we did touch on a 4.60% yield. And if you remember last week, I talked about how sort of a simple way to track mortgage rates is take the 10-year bond yield, add 2% of that, because historically that's about the average spread. A little bit on the high side, actually, but still, especially right now because inflation's still considered a little bit above target. Take that 10-year bond yield, add add 2% of that, that's going to give you a pretty good idea where the mortgage market is in terms of a conforming conventional rate, right around 6.5. But again, check with us because we generally consistently run a little bit better than what the news tells you. And the market did close today— the 10-year bond yield market did close today at 4.55. So what's going on data point-wise that's making the market, market move? Well, I'm going to start off with a the first bullet point. And yes, I'm going to say that, pun intended, Iran oil price trumps economic data points. And what I'm basically trying to say there is, yeah, the data points are still having some impact on, on the markets, how the bond market reacts, how the stock market reacts. But really what's driving the changes from day to day and from, from week to week, and I have to say now from month to month, at least since February, it's really mostly all about Iran and oil prices. That's why I say that those are trumping the otherwise data points that we see from week to week. They, they're just tending to carry more weight than some of the other data that, that the markets normally rely on. This week the calendar was relatively light. Monday we had the Institute of Supply Management— that's ISM— Services Index. It was up in June. And, and above what it was in May. And that's a good thing. In fact, I think it's been 14 months now of continued expansion in the services sector. So there's a clue to you that the economy is still, despite the headlines, it's still doing pretty darn well. The other big news in terms of data this week was the FOMC. That's the Federal Open Market Committee. The minutes of the last meeting were released this week. What they showed quite clearly is there is definitely some division among the board governors, the Federal Reserve Board governors, as to what the future path of interest rates should be. Of course, it says interest rates, the headlines say interest rates. It's really more about directly the Fed funds rate. And again, given the latest— thought we had a deal, but now it's off and we're back to bombing Iran and looks like a deal is not going to be made. That's, you know, spooked the markets a little bit, and that's sort of reinforced the belief that we're certainly not going to likely see any Fed funds rate reductions this year at all. Now, the split, the division in the Fed is more about not drop the Fed funds rate, raise the Fed funds rate, but rather keep it steady where it's at or raise it. So that's where the sentiment, that's where the bias is right now. So, uh, that underscores what I've been saying for a long time. And I actually saw a news headline that actually showed the phrase that we always show at the bottom of the screen, you know, on interest rates: higher for longer. So I actually saw a headline that said exactly that based on the Fed meeting minutes as well as what happened this week with the Iran situation. One writer did write, uh, consider interest rates, mortgage rates, to be higher for longer. So I'm gonna take credit for that. Maybe they've seen our show and they kind of borrowed that phrase. But in any event, that's an expectation I think you have to embrace. We're not anywhere near seeing substantial improvement in mortgage rates. Certainly not, probably not much improvement at all for a good portion, if not the balance of this year going into next. So I would say get that outta your head and then start thinking about more, you know, what you can do in terms of if you're looking to buy a home, take advantage of the current situation in terms of conditions., and then help, you know, we can help you with ways to structure your financing to take advantage of the current conditions where I think buyers do have leverage and where we can help you get a more affordable financing plan to be able to buy that home. You know, I want to remind you too, last week, uh, we didn't have our show. We, we were not live last week. Uh, the employment numbers came out. We did have, uh, less jobs formed, 57,000, according to the Bureau of Labor's statistics, that was lower than forecast, but yet the unemployment rate dropped to 4.2%. So all in all, that was a pretty good indication the labor market's fine. Uh, 4.2% unemployment rate is considered in the economic world, the economics world, near or at what we call quote-unquote full employment, because you're always going to have some percentage of people out there who simply aren't looking for a job even though they're capable of having one. You're never going to see the unemployment rate at zero, and if you can get it down as low as 4 or a— but less than that, that's essentially considered a full employment economy. And so the other thing in that regard, initial claims for unemployment— I don't typically put it on this screen, but I do tend to mention it each week— uh, it's, you know, steady Eddie, 215,000 initial claims for unemployment. It's been in that range, the low 200,000, you know, level for months and months now. So again, all the indicators from a labor market standpoint are that the labor market's doing just fine. The only other significant Data point this week was existing home sales, a little bit of a disappointment. Um, 4.1 million in June, uh, 4.2 million was the previous month in May, so that was a 2.4% drop. And again, mortgage rates are pointed to as a reason for, uh, that number not being better than was the previous month. And because of— and because of those rates, a little bit of a drop. But the other thing I would point out to you, which is interesting, despite that drop in home sales The median price of the home was still up, uh, this last period, June, up 1.8%, $440,600. Now that's a national median number, but it's a good indicator of what's going on in, you know, pretty much all the markets, including our local one here. You know, home prices up 1.8% from a year earlier, you know, on a national scale. That's interesting to note because while we can kind of, you know, moan and groan about the sales rate, both existing home sales, new homes aren't as robust as we'd like to see it. You would think that, oh, maybe that's going to be a reason home prices are going to not just moderate but maybe fall. That hasn't happened, folks. I mean, home prices are, yes, increasing at a moderated or declining rate, but overall home prices are still creeping up higher month to month, quarter to quarter, and year over year. So if you're waiting for home prices to drop, I would suggest to you that's, uh, That's a bit of a fool's game. And I think you've got to refocus your, you know, what you're targeting there and realize that home prices are where they're at. They're not likely to drop a whole bunch. And so you've got to figure out a way, if you want to buy a home, what can you do to create some more affordable conditions and parameters for that financing? That's where we can come in and give you a lot of ideas how to structure your financing, structure your offer to buy the home in order to get the kind of concessions that you would need that we then can use towards your financing to help help you, you make that, that mortgage payment and that interest rate more affordable, at least in the short term, for, you know, next 2 or 3 years. And hopefully that will give you that window to refinance into a better rate when rates overall, you know, eventually fall. So that's basically what we have in terms of the mortgage market this week and the data points. Again, keep an eye on the fact that Iran and oil prices are really driving pretty much everything. So we'll see what happens, what unveils the next few weeks, as it looks like the war conditions are starting to ramp up yet again. So, uh, with that, we'll go ahead and bring Jeff on because we're going to have a little bit of discussion about the old dilemma that I think a lot of folks are dealing with right now. If you own a home, is like, do you renovate it or do you sell and buy another? So we'll get into that discussion right now.

We'll get right back to today's program, but first I want to share something that could be incredibly valuable for senior homeowners. If you're over 65, own your home outright, or have at least 50% equity, you might be sitting on a powerful retirement tool, a reverse a mortgage. But how do you know if it's the right move for you? That's where our free Senior Homeowners Guide to Financial Freedom comes in. In just a few quick questions, you'll find out if a reverse mortgage could help you unlock the equity in your home to boost your retirement income. Click the link in the description to take the free assessment today. It's fast, easy, and could be the first step to a more secure retirement. Now let's get back to the show.

Hey, Art, good to see you. You know, before we get too far down the road, I just want to say happy birthday to Art. He's with us another year. He still looks fit and young and a lot of energy. So happy birthday, Art.

I appreciate that, Jeff. Thank you. At my advanced age, I always have to prod myself to make sure I'm sounding happy about it.

But, you know, it's a celebration for sure, right?

Yeah. Well, I got to celebrate being above ground. So that's for sure.

Well, you know, I have to say something that I got a message yesterday from someone from Greater Palm Springs Real Estate Group who you invited me to speak to. And she said, we were talking about AI, and she said this 70, I think she said 77-year-old grandma is so excited about life because of what this is doing for her, what she can do that she wasn't doing before. So I said, I'm gonna retag that AI is the fountain of youth. Or yeah, the fountain of youth. So who knows, it may be the Ponce de León we didn't know about.

Yeah, that's a good point. Yeah, I, I agree with you on that one, that's for sure. Yeah, yeah.

So, uh, hey, I, I want to ask you something about the, the home prices here, because I know we had some stuff come out here locally. And do we still see the same, the same kind of numbers here locally as they talking about here nationally, Art, with the, with the price still going up?

Well, yes and no. I mean, in our local market, there has been a little bit of decrease in the median price, but not a whole lot. In other words, we're talking in, you know, a couple percentage points. So, you know, and it— and then it varies by city. Of course, for the folks who are not familiar with the Coachella Valley, we've got 9 different cities here. We've got sort of our own little micro market, and you have to look at each city where you're going to see variances between the median prices and the changes to those prices, you know, from month to month and, you know, year over year and so forth. And so depending on the city, you, you can see there has been some, you know, decrease in the median price from a year ago, whereas others it's held more firmer or even still slightly above the previous year. But I think the overall point there is, you know, I think there's some folks out there who are on the sidelines wanting to own a home who are somehow still holding on Uh, with the notion that, you know, we're waiting for home prices to fall, you know, maybe to the extent that they did back in the Great Recession of '08. The conditions are simply not there to suggest that that's going to happen. As I just commented on them, the labor market's doing just fine. Real wage growth has been basically, if not exceeding the inflation rate, holding pretty steady to that inflation rate. So folks are not drastically losing purchasing power, although some of the headlines would suggest otherwise. The data though doesn't support that. So, and you know, in foreclosure activity, you know, compared to the Great Recession is next to nothing. I mean, in a relative sense, you know, and I've said before, I think part of the reason for that, and I'll give credit to the folks who are running the country back in 2010, when the CFPB was created and the whole new set of mortgage qualifying rules were put into place in the industry, the what we call ATR, the ability to repay, meaning we have to document your income and we do that extensively. Yes, it can be frustrating. It can be tedious. But I think the byproduct of going through that process rather than the simple and, you know, the simple, easy sign an application, I'm not going to tell you where I work. I'm not going to tell you how much I make. Just give me the loan because I've got a good down payment, a decent credit score. That didn't work. And so that's why all those foreclosures occurred at the time. Now, all the folks who've gotten mortgages since '08, they were put through the process. Yes, it's a tedious one, although we here at MortgageWorks try to make it less tedious for you. Uh, what it did is it established that the folks who got those loans were able to afford them. So unless they ran into, uh, you know, a, a sort of an event in their life that, you know, disrupted their income for some reason. Most folks are doing just fine. The loans that they initially got, they were able to afford it and they still can. And so as a consequence, it's just not been a set of conditions that would suggest that, you know, home prices are going to fall. And, and I've said before too We're actually, even with a little bit of an uptick this week and the overall little bit of an uptick since February when this Iran war started, mortgage rates are still 2 to 2.5% better than they were in 2023. So those waiting for lower rates, I know it doesn't feel like, you know, 6.375% is a lot lower, you know, or lower to the level you want, but it's lower than it was 2.5 years ago. And, um, as a consequence, you've got to embrace that and then figure out how you can move forward. We can help you in terms of showing you ways to do that.

Well, two quick points. One is, um, I visited a friend this morning who's a real estate investor, and he was talking about how things are staying on the market longer. And he was talking about a home in the area he lives in, in Palm Desert. He said it's been on the market two years now. Me, as also a former real estate investor, I said Obviously, the price of the home is not, is not correct. And I hear that from other agents. How much is that causing, you know, the days on the market to stay longer? Because we do have that long-term memory and we see it in the '08. We remember '08 and we remember, you know, COVID and then the big cycle here with the home sales and the interest rates. Do we have that memory of our home? It's got to be higher because of the history. Versus, hey, this is reality?

Yeah, I think there's still some sellers out there who are holding on to these notions that, you know, the market's— it's like they're not willing to, to accept the signals the market are giving them.

Now, that—

this house you're talking about, 2 years on the market, that's an outlier. That's, that's— there's something weird going on there. Yeah, uh, you know, that seller and/or their agent, uh, they need to, they need to get somebody to talk to because, uh, you just don't keep a home active on the market for 2 years because, you know, that's what we call in the real estate biz, that's a stale listing. Man, oh man, that's, that's stale, that's moldy, that's— I mean, you ought to take it off and just, you know, go quiet for a while and, you know, try again. But in the meantime, you know, come to reality as to what your home is really worth. You know, the average days on market is longer than it was Uh, you know, because again, especially in the pandemic, I mean, we were talking about, shoot, I mean, 18 days, you know, and you're getting, you know, 22 offers and selling at a premium over your list price. And in a lot of cases, if not a majority of cases, that's all gone. Days on market is extended, but it's not extended overall to that level. I mean, we're talking 49, 50, 52 days, which actually is back to more or less normal conditions. And, you know, historically days on market of about 60 days was considered normal. So we're pretty close to that, but it's been enough of a shift that I think it's given buyers, prospective buyers, the leverage that they didn't have not long ago. And that's what we keep trying to persuade people to realize. Buyers now have leverage. That days on market is extended out enough, uh, that you can make some deals. I mean, I've got another— I keep talking about it. I mean, I have a transaction that involves a VA on, and, you know, they were gonna, um, offer a lower than list price, um, and I talked him into, you know, you really ought to consider, uh, offering full price and then, uh, asking for a seller credit. Sure enough, they got asked for $12,000, they offered full price, and they got their offer accepted, and we're in, we're in process with those kind of terms. So, uh, that's the kind of, you know, negotiating that you need to take advantage of and pursue because the conditions will support your efforts in that regard.

You know, last point here, and it talks about two areas. One is in the, is in the data that we had for year over year, and it went back, you know, pre-COVID, and it started showing the sales and it started showing days on market. And when you take out the spikes of COVID we're almost back to normal as far as the number of sales, the days on the market. And yet we still cling to that, that, that, well, it was this way. But if we take that out, this is one of the things I love, the extension of the graphs, because I'm like, it's, it's really almost exactly the same. What are your thoughts on that?

Well, you're right.

I mean, in most markets and including ours here in the Coachella Valley, and I'm seeing more headlines, more folks in the business world and business articles and so forth writing about this. We're more or less getting back to 2019 levels. And just as we say to everyone, look, expectation-wise, rates for higher than— higher for longer. Also understand we're now back to 2019 levels. And at 2019 levels, in terms of all these data points, Uh, folks weren't sitting there looking for rates to fall or prices to fall. You know, they were actively buying and, you know, financing their, their purchases and so forth. We're back to that level now. Again, we're not at 3%, we're at 6.38, 6.25. Uh, but again, we can help, you know, attack that with some seller concessions that you now have the leverage to negotiate and make that happen so that it can feel like you were in 2019, not just in terms of being able to get back to buying a home, but be able to get financing that may, at least for the first couple, 2 or 3 years, feel like the kind of rates we had in 2019. Which of course, 2019 wasn't, you know, 2.5% mortgages. It was more like 3 to 4. But again, that's the kind of thing we can get you into that 3 to 4 range with some of these strategies.

Well, I tell you what, I think it's one of those things, either you read tea leaves or you watch this show to figure out what your next step should be. So Art, thank you. Let's get into today's topic. Thanks for, thanks for giving me leverage or that, that leniency with that. So really, the first, the first thing is homes across America are older than they've ever been. Renovation costs keep climbing, and many families now have adult children moving back. I know that's really nice news there. So here's the big question: does it make more sense to renovate the home you, you have or to buy the one you really need? And that's really the, the overarching question of our topic today. So let's get into the first one. Okay. And so the average home now, this is when we did the research, it was like this. This surprised me. The average home in America is now 44 years old. Are you seeing more homeowners choosing to renovate because they feel financially locked into those current low mortgage rates?

Yeah, we are seeing more of that. But, you know, in that regard, when I get approached with somebody who's sort of got that mindset, I don't just necessarily take that and run with it in terms of trying to address what they're thinking in terms of giving them the financing options. I want to have a little bit more of a discussion about, is that really the right thing for you to do, uh, as to what you're thinking? Because yeah, I mean, homes are getting older than ever. 44 years old is a pretty, you know, it's pretty old home. And then you've got that layering into that this other phenomenon, which I actually read a few articles about earlier this week, you know, about, you know, you know, grown, you know, children, adult children who are more often now moving back to mom and dad's house. And, and what's interesting is while that not long ago was looked at sort of in a negative way, like, you know, the person who was doing that was not viewed real positively, uh, you know, having to go back to mom and dad's home. It's actually becoming more socially accepted. The reasons why adult children are doing that are now being more accepted as, okay, that makes sense for you to do that. And so, um, you know, the issue becomes when someone is in this decision point, yeah, it's usually couched in the notion that Yeah, my home's, my home's old. I'd like to get a newer, bigger one, but, you know, I'm locked into my current 2 to 3% mortgage. And so that tends to kind of overtake their entire thinking, like, well, I only have one choice. I have a 2.5% mortgage. Well, then the only choice I have is I've got to renovate if I don't like my house as to its age, because that causes, you know, now at an age where there's maintenance repair issues. Or because it no longer serves my needs as well as it did before. Maybe because I have a growing family if I'm, you know, a younger owner with now children that I didn't have before, or I'm an older owner who I thought was— I thought I was an empty nester and like, oh, wait a minute, uh, there's somebody at the front doorstep that wants to move back in. So you gotta, you gotta realize that even though you have that 2.5% mortgage, uh, that doesn't automatically mean you're stuck Uh, and that the way you need to meet those additional needs you have has to be through renovation. You have to kind of take a more balanced view of which choice to take, you know, because renovation costs certainly aren't getting any cheaper. A lot of renovations these days are pretty pricey and pretty costly in terms of what you're going to do. So what I always do is try to start with, well, okay, I mean, if you want to renovate, we can certainly provide you some financing options to achieve that goal. But at the same time, what, what is ultimately the, the basis of you making that decision? Are you doing the renovation because you need more space, uh, you need more features in that home, you maybe have an adult child or children coming back in? Okay, that's fine. I would suggest if you're going to go the renovation route you might want to consider what is your life plan in terms of how long you're going to keep the home, uh, because a lot of cases you don't want to necessarily renovate a home with an idea that soon after you complete the renovations you're going to turn around and sell. I mean, if that's the case, you have a pretty short timeline. I would argue even if you have a short— a low rate loan, 2.5% or whatever, you might be better off selling now anyway because, you know, those renovation costs I mean, there's got to be a payback there. You don't want to spend $150,000, $200,000 to renovate a home, and then, gee, year or two after you do that, you end up turning around and selling. Uh, that may not in hindsight have been the best choice to make. And so that's part of what I do when I get confronted with that kind of inquiry is let's talk and talk through. And I'm— I become sort of a sounding board, a devil's advocate, to like check their thinking and make sure that— don't necessarily feel like you're locked into your home just because of the rate. There may be a reason why you should give up that rate and not renovate the home, just sell it and buy another. I'm the person who I think can help people think through that more thoroughly and come to what's going to be the right conclusion for their situation.

You think some of those things are, uh, you know, when somebody's thinking about Okay, what we're talking about here is it's, it's more emotional. And when they were able to talk to you, you're giving them data that can now give them factual— it's almost like, it's almost like they're in a, on a dark road and you're like lighting it up and showing them really what the opportunities are or the pitfalls so they can then make a really sound decision.

Right. Yeah, exactly what I do. And now I'm going to give you an example real quick just because it's a real-world example I just went through Yesterday, and it's a little off the topic in terms of the renovation question, but I think overall still focuses on do I keep my rate or get rid of my current, you know, low rate. Past customer, I did their loan, you know, a few years ago during the pandemic. They've got a rate like, you know, I think it's 2.78 or something. I also arranged for them $150,000 HELOC, so they got both loans on their home and the, the person, you know, approached me about, geez, I'm thinking about should I, you know, combine the two loans and get a 15-year loan, but worried about giving up that low first mortgage rate. Uh, but then the person also shared with me that they were shocked to realize that that HELOC that they've been paying on for like 5 years is still at $150,000. What they didn't realize was the HELOC, as is generally the case, offers an interest-only minimum payment feature. What did they do? They set up automatic payment at the minimum payment, and they get their statements and throw them away and not see the balance wasn't changing. And so 5 years later, oh my gosh, we still owe $150,000, and now they're super motivated to pay it down. So they were thinking about combining the two and getting a 15-year loan. So I went over the numbers a little bit, let them know what the payment would be, let them know that you'd be giving up their first, uh, first mortgage rate. Um, and they were initially, no, no, no, no, uh, I'm just going to pay extra on the HELOC to pay it down because they want to like be in a free and clear position by the time they retire. Well, how much more are you going to pay on the HELOC every month? $2,000 to $3,000.

Oh boy.

I'm like, well, wait a minute, if you're going to do $2,000 or $3,000, that's still going to take you probably 6 years to pay off your HELOC and you're still going to have probably 20 years left on that first mortgage at 2.78%. If you're trying to get to a free and clear position, say in the next 15 years, which is why you wanted the 15-year loan, that strategy is not going to get you there. So in this case, you would be better off get a new mortgage one loan, combine the two. Yes, at current 15-year rates, about 5.75%, you're giving up 2.78%. The payment for that is probably going to be less than your current low-rate first mortgage, plus $2,000 or $3,000 extra on your HELOC. And at 15 years, you're done.

You're free and clear.

Now, once I explained it that way, she's like, oh, I get it now. So that's the kind of thing I help people think through. With the numbers to make sure they're not being just emotional about, I can't give up that first mortgage rate no matter what. Sometimes you got to let go.

I think that's so smart, Art. That's a great story. And it illustrates how important it is, as you say, to talk to somebody that is not emotionally attached to say, here's the reality of the situation. That's a great point.

Yeah.

Let's talk about the next one. And this kind of goes back— you've kind of let the cat out of the bag. We're going to look at it a little differently is With more adult children moving back home after college, our family's beginning to rethink what they actually need from their home. In other words, it's like, you know, we see the story of, okay, now the husband's turned into his man cave, or it's a sewing room. I don't know if women still sew today, but you know, now all of a sudden it's like they're moving back and it's like, oh geez, I've got to do something different.

Well, yeah. And see, what, what, what that does is it presents the homeowner with some realization of we got to do something here. Because, you know, it's in many cases, as we just covered, it's likely an older home. Um, and especially if the adult children scenario is what's involved. Um, and what I read in these articles, it's not like these adult children are moving back in because they're unemployed. They're employed, they're working, they're earning income. Yeah, but they've got an arrangement with their family, their parents, where they're allowed to move in and basically not pay rent. Maybe they help out with daily expenses, whatever. But then you realize, well, the home's not necessarily going to be meeting all of our needs, especially when we have more adults in the house, you know. So that what's that— what, what that is underscoring is there's more multi-generational situations occurring in terms of home ownership. We've got multi-generations now living in homes much more often than we did before. It's more accepted. But then what that does is it really makes you realize you've got needs like You may need to have a home office. You know, you may need to have an ADU or a guest suite, or you may basically just not have enough gross living area, GLA as we call it, and you may need to add on. And so that's where you get into the scenario of, well, again, I may have a low first, low first mortgage rate, But I've now got my son and daughter just moved back in, and they're, you know, 32 and 29, and they got jobs. And we need to, we need to re-engineer this house in order to support this multi-generational living arrangement. And so that's what then underscores the fact that, oh, we need to figure out— and in a lot of cases, there's a lot of equity in this home. So now it's a case of, all right, time to tap into that. And kind of make a plan, you know, get some help with a contractor, interior designer, what have you, architect, and let's, you know, create the additional features, facilities, room, uh, in terms of, you know, square footage and rooms themselves, or detached ADU, in order to meet what is now sort of our newly established multi-generational household situation.. And that's again where we can come in, interview the customer, and figure out what their needs are, what they think the costs are going to be, and then what's going to be the best way to finance those improvements so that they, so that they then can stay in there long term with that multi-generational family.

I like that. Uh, two situations, uh, I've mentioned this before. Our next-door neighbor, uh, their daughter came back from overseas. She had done about 5 or 6 years overseas of study and also training and work. Well, she's been living back home now since January. And, you know, I hear the things, oh, it's working out. But it is one of those things where the wife had already decided this was— she likes to do crafts, that now she'd use that bedroom for a craft room. Now that's gone. So she had to give up her thing. And the other one was I heard from a client a couple of days ago where they moved to a new location, they're renters. And they have two adult— uh, three kids, two adult children. One of them was going to move out and then live with a couple of other friends, female friends. And when she looked at this, she said, you know what, I think I'd rather stay at home, and I would rather pay you rent than live with somebody I don't know. Now, that may be good, it made her heart warm, but it also— it's like, hey, you know, they're bigger, they eat more. And they still like you to do their laundry. So it kind of changes things, but you know, are things like, are things like exterior doors and maybe extra bathrooms and things like that, are those in the conversation, you think?

Oh yeah, for sure. Yeah. Although, I mean, that's it. I mean, you may have to add another bedroom, you know, it may not be an ADU, although an ADU is a good idea because it's a bedroom and in fact can be fully self-contained with its own little kitchen and bathroom and so forth. Uh, so that if nothing else gives you some, a good option if you need another bedroom long term, because maybe eventually that adult child will turn around and move back out, and then you've got this detached ADU that certainly suddenly can become a revenue stream for the parents who, you know, stay put. So you got to think through that too and realize you could have some improvement, some renovation like that, that can pay off in multiple ways. You know, short term, help out with the adult child coming back in and living with the parents. Long term, a revenue stream that they didn't have when the adult child moved in. And so that's, that's the kind of scenario that you want to think through. And that could actually be a pretty good one when you consider all aspects of what's going on there. So good point.

Let's go to the next one. Uh, you know, we've talked about this: is it cheaper to keep it? And really, many homeowners automatically assume that remodeling is cheaper than moving. And it almost reminds me of— it's, it's cheaper to rent than it is to buy. And that's a different— that's kind of a similar conversation. Is that always true here?

Not always, you know. And see, one of the things about this is, um, it really depends, number one, on what is the extent of the remodeling that's going to be done. You know, I would argue that, you know, and remodeling costs, as I just mentioned earlier, they're getting up there. I mean, remodeling is not inexpensive. Uh, you know, most folks are surprised, for example, how much it costs to, you know, add an ADU. I mean, it can easily be $200,000 or $300,000. You know, wow. Um, so it really depends on the cost. I would say if you're going to do any kind of remodeling, restoration, or even maintenance and repair issues on older homes, you know, if it's $50,000 to $100,000, it's probably— that would, you know, I think give the edge to do that remodel, that refurbishing, uh, and stay put. Uh, but when you start looking into the remodeling, if it gets extensive you know, it's $150,000, it's $200,000, it's $300,000, or my gosh, maybe up to $500,000, then you start going, well, wait a minute, is that really the best scenario versus, you know, taking what I have now and just selling it as is and then going and buying another? Because one of the, one of the issues you have to consider is, you know, again, what's the cost of your existing financing? You know, what's the, what's the rate on your existing mortgage? Well, and then if you, if you need a substantial amount for remodel, um, then you have to consider ultimately what's your overall interest cost going to be. And because, you know, that secondary financing is going to be a higher rate than that low-rate first mortgage you have, and there's a delta there where you start going, well, you know what, overall, even though I want to keep that 2.5%, if I'm going to have to spend $500,000 for my remodel and that rate's going to be, you know, 7% or 8%, then you— that should make you think, should I really do that? Does that mean remodeling is cheaper, or am I better off leaving the house the way it is, sell it like it is, and then go out and buy a new one that's going to have those additional features that the remodel would provide you? Yes, it'll be at current mortgage rates, 6%, but that overall may be financing costs that are as good or better overall than keeping that 2.5% mortgage with that higher rate, $500 grand, to achieve the same additional features that you want. So you have to again go through that analysis to make sure that the numbers dictate what really is the best choice, not just keep it on an emotional level.

You know, I think about how often— and I'm not trying to compare a car to a house, but oftentimes, you know, I hear people say Oh, you got a new car? I said, yeah, I had to get new tires, and I felt it was cheaper to get a new car than it was new tires. And I'm like, well, your car was 5 or 6 years old. And they said, yes, exactly, it was an older car, why put new tires on it? And when we talked about this before, the average, you know, age of a home is 44 years old. Does it really— it's almost like, okay, I put new tires on it, but then the transmission goes out. Well, it's like in this example here, yeah, I wanted to redo some wiring, but when we opened up the wall, we found out all this rot, and we found out all the pipes were bad. And all of a sudden that could really spin up into some really big dollars. So I often think, can you, can you compare that analogy of a car needing tires and saying, hey, let's just get a new one because it's all brand new now?

Well, yeah, I mean, in fact, of course, you're talking to somebody who has a 6-year-old car with a lot of miles on it. But I've always been skeptical of the idea that, oh, I'm starting to have to get it repaired more often. I better just sell the car and buy a new one. To me, that gets you into this trap, this, this cycling of every couple, 2 or 3 years, you know, you're buying a new car because you feel like it's too costly to repair. But, you know, when you consider a new car now, the average price is $51,000 and the average car payment is $800. I don't know. I don't buy into that. I mean, I try to make, you know, my car's older. I don't buy cars all the time. I keep cars until basically I break them.

Well, you like classic cars too.

Well, yeah, but in the meantime, I try to maintain that car and spend the money to, you know, change the oil frequently. And when there's problems that, you know, need to be addressed, keep it— you know, they don't say tune-up anymore, but, you know, keep it serviced so you can extend the life of the car. And I think to that extent, you can do that with a home to a point, but then eventually you may get to a point where, especially on the maintenance and repair side, the amount of stuff that you need to do could be very extensive and very expensive. And then you have to have a talk with yourself, should I go ahead and pursue that? And I think the key question in making that decision is, what's my life plan with this house? Is this my forever home or nearly so? If I'm going to be in here for a lot more years, I think in a lot of cases it calls for do those maintenance issues the repair issues, maybe do those improvements, add-on, what have you. But if it's something where you think, I may not keep this home very long, then that would probably lean toward you're better off selling and buying another.

Smart, smart. All right, so the next one is, uh, before you write a check, know all your financing options. If someone decides they do want to renovate, Art, what financing options should they understand before simply writing checks out of savings?

Well, there's a few things. Number one, the most popular thing in this, on that particular subject, is a HELOC. You know, everyone's calling about a HELOC. Now, I would always tell people, look, tell me what you want the HELOC for. If they tell me it's because, you know, I want to redo my kitchen and maybe a bathroom, okay, do you want to use it for anything else? Do you want to have a HELOC where you do all those things but have some additional access to funds when needed later for a rainy day? Well, they say yes, then of course, that certainly probably does call for a HELOC. If they say no, no, no, no, I've got a specific project, a kitchen, maybe a powder room, that's it. I don't have a need for any other funds to tap out of my equity. I've got plenty of other assets. I'm wanting the HELOC because I don't want to tap into those assets. I'd rather finance those improvements. See, in my mind, you ought to really look at what we call a HE loan, you know, equity loan, a fixed-rate loan. You've got a specific project, a specific need. You're not interested for— you're not interested in extra cash or access to extra cash after that project is over. And so when that's the case, I always urge people look at a HE loan as well. I'll give you the form, the numbers on both, and then help you decide which, which one is really going to be the better one for you. And I had this example just come up this morning. I got a call from a guy, owns a home for $1.5 million, got a $300,000 mortgage on it, and he called me and wants to talk about a HELOC for $500,000. Now in his case, he wanted about— he needs about $200,000 right away, and I guess it's for money to put into his business. But he did want to have additional funds available to access, you know, as what I call a rainy day fund to access later. Now that, by the way, is more common with business owners because at times, of course, they have a money crunch, cash flow, what have you, and they may need a facility in place that they could rapidly access if they need additional funds for their business. So in his case, we didn't even go down the road of talking about a HELOC, an equity loan. In his case, a HELOC made the most sense. The other thing about this is whether it's a HELOC or HELOC, I always want to make sure folks understand the relationship between their existing first and its rate and the rates on the equity loan, whether it's a HELOC or HELOC, because again, there's a delta there. If you have a really low— and this could be a case with this guy that called me this morning, you know, if You know, he may be thinking, oh, my, my $300,000 mortgage is at 2.5, but I need $500,000. Well, that $500,000 may be at 7.5. Well, I'm going to do the— what we call the blended rate analysis to determine keeping the first, getting that HELOC at the higher rate. What's the effective rate for the entire financing package? Well, if it turns out that effective rate is higher than what he could get on a regular cash-out refi and just get a whole new first mortgage, Uh, it may make more sense to do that cash-out first mortgage refi, give up that low-rate mortgage on that he has now, and he'll end up with an overall lower interest cost. Now, in his case, we touched on that, but it was like, no, I don't necessarily need that, you know, that whole $500,000 now. I need $200,000. I want the $300,000 just in case I need it later. You know, with the HELOC or a cash-out refi, you're going to get all the money at once. And then you're going to make your payments based on that entire loan balance. And in his case, he didn't want to do that because there's at least $300,000 that he doesn't really need now, but he wants to tap into later. And that's the benefit of a HELOC. You can get access to that additional funds. But in the meantime, until you don't— until you do access it, you're not paying interest on that part of the HELOC because it's not been drawn yet. And so that's why a HELOC can be a very good situation for somebody who has an immediate need, immediate project, but wants access to additional funds later on in an emergency or if needed for some other reason.

Makes total sense. For those people, maybe they're just hearing this particular example, HELOC and HELOC for the first time. You said this before and maybe clear this up for me is you said like a HELOC is like having a credit card and your home is security. A HELOC is a little different. Isn't it?

He loan is just like a first mortgage. It's typically a fixed rate loan. Uh, we can offer them with terms of 10, 15, 20, 30 years. When you get the loan, you get the money all at once. You don't get to draw on it later like you do a credit card. Uh, it's a lump sum disbursement. That's why I say a HE loan is a good option if you have a specific project, a specific amount of money you need to complete that project, and you have no interest in accessing additional equity in your home for cash. In that scenario, a HELOC is usually going to be a better option. And a lot of times, believe it or not, the rate can be as good, in fact even better, than a HELOC. Uh, because again, a HELOC is a variable rate loan, so you also have the risk of— let's say the Fed starts raising the Fed funds rate. If you have a HELOC, that's going to hurt you because the HELOC is going to be tied to the Fed funds rate almost directly through the U.S. prime rate, which is what most HELOCs are tied Got you.

All right, so let's go to the next one. Uh, the next one is, uh, before someone spends $100 grand remodeling their home— and you've kind of talked about this— or decides to move, what conversation should you have with a mortgage professional first? Meaning you, right?

Exactly.

That, that is the— what we just touched on. It's important to understand what the remodeling project is and is that the only need to access the equity. If it's only that, as I mentioned, the HELOC makes more sense. If you need money for a project but also want access to funds at a later date, you know, think of a HELOC, the unused portion is sort of like a savings account. It's a savings account that's not paying you any interest, right? I mean, you don't get interest on the unused portion, but you're also not paying any interest cost on it because you haven't used it yet.

So you think—

so think of it as the unused portion of a HELOC as a zero interest rate savings account. So that way, in an emergency, or if you have something that breaks in your 44-year-old home that you didn't anticipate, you can write a check and get it fixed. You know, what if your HVAC system goes kaput and suddenly you've got to spend $20,000 to replace it? Well, if you have a HELOC with an undrawn balance, boom, you write a check, you're done. Uh, but in the meantime, you're not paying any interest on that unused portion. So you've got to kind of go through that thought process as well. And the other thing though I want to point out is we see cases where folks might want to get an equity loan or a HELOC, and they're going to do that because it's an older home and there may be some things that need to be repaired, or they may want to do some remodeling, like, you know, refresh that bathroom and the kitchen and so forth. But they're doing that more with the idea of, I want to sell my home, but it's kind of in poor shape, so I'm going to spend some money to kind of bring it up speed and then sell it. Ah, caution that. Now, I, you know, red lights flashing. Be careful with that because understand that if you go that direction, you're not going to get dollar-for-dollar return on whatever maintenance or repair in particular, or even, you know, remodeling improvements like a redone bathroom or kitchen. You're not going to get a dollar-for-dollar return when you sell. And, and then the other big factor is you may be making those improvements, uh, you know, repairs are a different issue, but you may be making those improvements in such a way that the prospect— the prospective buyers out there may not like them. They may not like the way you redid that kitchen or that bathroom. So as a consequence, if you're looking at any kind of refurbishing, remodeling, um, especially because you want to then sell it You know, talk to us, but talk to an agent, real estate agent. Get some good professional information from somebody who sells, you know, sells, listen, sells homes all the time. Is this going to be a good strategy to get a return on your investment? Are you better off selling it as is? Yeah, you're going to have to bite the bullet on what kind of price you're going to get, but a lot of cases you're better off doing that than going through all the remodeling and make it the way you think it's going to be nice. Well, the first buyer walks in and goes, I don't like this. I don't, I don't like your taste. I don't like your style. And they're going to turn around and redo it again. So you got to be really careful of that. And, and that's part of why when it comes to remodeling, understand what the homeowners— what's their motivation, you know, what's their, what's their long-term strategy here. And if it's, if it's remodel to sell, I just urge caution because that oftentimes is really just not the best execution.

You know, Art, this whole thing between renovating or relocating, it just doesn't seem like it's a straight line.

No, it's not.

It's not. And, you know, and so first of all, I want to say thank you for taking the time today to go through this and really lean on your expertise. You've got over 4 and a half, 4 and a half decades of being involved in this. And it's really nice to say, hey, this is not an emotional thing. Let's get the emotion out and give you some information that you can make a really good decision on. I just want to say thank you very much. And I think especially in the time of right now. Like you said, it's a little weird. I think back when I was a kid, you know, my parents would say this, and I think it was tongue-in-cheek really: if you ever need to come home, you can. But it was almost like, but where you're going to stay is not in your bedroom, but you're going to stay on the couch. And it was always like a couple days and I'm out of there. It was never to move back in. And I'm not saying it's a bad thing for the adult children to move back in. If they have to, they have to. But it is a different time, and we have to make some decisions. So I really appreciate you sharing this with me today.

All right, you're welcome. Well, thank you everyone for watching and listening to this week's Mortgage Minute. Uh, since we've been talking about renovation loans and equity loans and so forth, I wanted to at least alert you to a special that we have going on for, uh, for HELOCs for the month of July. Uh, what it entails is you can get a standalone HELOC. That's a case where you're going to have an existing first and you just want to get a home equity line of credit as a second mortgage because you might want to do some of these renovations or improvements or repairs that we've been talking about, and maybe because you want to do have some funds available through that undrawn portion of the HELOC for a later day. Uh, here's what the deal is: you have to have a 760 credit score, qualifying credit score. You do have to draw at least $200,000 at closing of the loan, so of course that means you're going to be applying for a substantial HELOC, uh, amount. We can go up to a combined loan-to-value of 80% between your first mortgage and the balance on this HELOC that you want. It is only for primary residences, but here's the kicker: your interest rate, it's going to be prime minus a quarter percent because HELOCs have a margin over prime. So if you're a 760 score on your primary home, you're going to get a sizable HELOC and you draw at least $200,000 at close, and your first mortgage plus the HELOC line amount equals 80% of your value, uh, or less, uh, you're going to be able to get a prime minus a quarter for the rate. Now, the prime rate right now is 6.75%, so minus a quarter, that means you can get a HELOC for, say, $200,000, $300,000, $500,000 if you meet these parameters at 6.5%. That is a terrific deal. So any of you out there considering a HELOC, give me a call. Let's see if you meet these requirements because this could be a very good option for you to get secondary financing to do those improvements or for a rainy day at a very, very affordable and attractive rate. So with that, I want to thank you all for watching and listening to this week's Mortgage Minute. Have a good weekend. Enjoy the rest of the World Cup, and then we'll see you again next week on the next edition of the Mortgage Minute. Art Alvarez at MortgageWorks, where we have the answers. They're on the house. So long, take care.