Waiting to refinance would not be wise

Question: We are thinking about refinancing our home and pulling out some cash.

But with the holidays coming up we don’t want to go through all the hassle of filling out the papers right now, so we are planning to wait until after the first of the year.

Interest rates seem to be dropping, which is another reason we are not in a big hurry. But we are concerned about your predictions that home values will fall.

Are prices already starting to come down? If so, should we refinance now?

C.H., Everett

Answer: You should refinance as soon as possible because the longer you wait, the more equity you are likely to lose.

As I said before, I expect home prices to drop about 10 percent to 20 percent over the next year or so, and then the housing market will flatten out with very little appreciation or depreciation for a few years.

And it’s already happening in several areas of the Puget Sound region.

One of the top local appraisers that we often use at my mortgage company says that about 75 percent of the homes that he is appraising today have comparable home sales in their neighborhood with depreciating prices. He says home values have dropped anywhere from 2 percent to 12 percent, depending on the area in which he is working.

In general, the farther a neighborhood is located away from the major urban job centers, the more its home prices have depreciated.

It’s simple supply and demand. Lots of homes for sale plus few buyers equals lower home prices.

Here are a couple of real life examples cited by the appraiser:

A house in West Seattle that was purchased for $499,000 on May 23 recently appraised for $470,000. That’s a price drop of 6 percent in only six months.

A three-bedroom condo in Renton that sold for $360,000 on Sept. 29, 2006, recently appraised for $335,000. That’s a decline of almost 7 percent.

And the sad part is that most people don’t even realize that this is happening. They still have the idea that their home is worth what it was at the peak of the housing market.

And this is just the beginning.

When the weather warms up and a flood of houses come on the market for the traditional spring home-buying season, you will see values drop even more; sellers will be forced to cut their prices because of all the competition for home buyers.

So I hate to be the bearer of bad news, but we are all going to see a big chunk of our home equity disappear over the next year or so.

Again, this is not a problem if you are planning to stay in your home and you have no need to refinance.

And it’s good news for home buyers who had earlier been priced out of the housing market and now have a “buyer’s market” where they can strike a hard bargain with home sellers.

But if you’ve been thinking about refinancing — to lower your interest rate and pull cash out of your home equity for whatever purpose — the sooner you do it, the better.

For example, if you currently owed $300,000 on a $400,000 home. You would have no problem refinancing and pulling cash out because you have $100,000 worth of equity in your home.

But what happens if the value of your home drops 20 percent?

Your $400,000 house would then be worth only $320,000 and you would have only $20,000 worth of equity in the home. That’s a loan-to-value ratio of almost 94 percent, which means you could no longer pull our any cash, and you barely have enough equity to do a “rate and term” refinance to get a lower interest rate if mortgage rates come down.

And what if you owed $350,000 instead of $300,000 at the start of this example? If your home value dropped 20 percent to $320,000, you would find yourself in the very uncomfortable position of owing more on the home than it’s currently worth. So if you’re thinking about refinancing, don’t delay.

Mail your real estate questions to Steve Tytler, The Herald, P.O. Box 930, Everett, WA 98206 or e-mail him at economy@heraldnet.com.

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