The convenience of selling your home without the hassle of getting it ready, putting it on the market, showings, open houses, negotiations and repairs comes at a cost … a significant part of your equity.
The companies, referred to as iBuyers, that buy homes from sellers are for-profit organizations. They expect to make a profit from sellers who are willing to discount the proceeds they’ll realize as an alternative to the conventional method of selling a home for people who need a quick sale.
The promotions for these companies generally state that you can receive a cash offer in a few minutes after putting your address online. The discount can be between 10 to 18% compared to normal selling costs from 6 to 9%. The cost to a person with a $100,000 equity could be as much as ten thousand dollars.
Even after you have accepted an offer, there can be contingencies in the contract that allow the company to inspect the home to discover the condition and reassess the offer to possibly make even more deductions. If the seller isn’t willing to accept them, the buyer can withdraw from the sale without penalty.
This appears on the surface to be a friendly, accommodating service but it can be an adversarial situation. The seller wants to maximize their proceeds and the buyer wants to buy it as cheap as possible.
Compare this to working directly with a real estate professional acting as your agent. They have to put your interests above their own. They have a fiduciary duty of care, integrity, honesty and loyalty in their dealings with you. Other duties include confidentiality, disclosure, obedience and accounting to the seller.
In this traditional model, your agent will provide you with the facts of what homes have sold for in the area and their opinion and recommendations on what the most likely sales price will be. Your agent will provide you an estimate of the sales expenses based on different sales possibilities.
They can advise you on work to be done prior to putting the home on the market, staging so your home will show at its best and estimate the time it will be on the market. Based on low inventories in some price ranges, it could be surprisingly short.
As an owner, you made an investment in your home in cash and maintenance. You are entitled to maximize your proceeds based on the risk taken to purchase a home instead of renting. The convenience of a quick offer has a cost to it. You need to compare the two alternatives to see which one benefits you the most based on your individual situation.
For more information, download the Sellers Guide.
Taking cash out of the equity of your home could be a legitimate way to fund a temporary cash crisis now or to have it on-hand if the need arises. Most homeowners can pull out the difference in 80% of the fair market value of their home and what they currently owe.
The most frequently cited reasons for refinancing are to lower the payment, eliminate the private mortgage insurance, combine mortgages, consolidate debt, convert an ARM to a fixed rate mortgage, remove a person from the loan or to take cash out for another reason.
The option of using your equity to deal with unexpected living expenses or potential lost wages in the future could be a good reason for doing a cash-out refinance. It is important to consider that it could increase your monthly payment instead of lowering it which would result in higher expenses during uncertain economic times.
Some lenders have recently raised the minimum credit score requirement but borrowers with good credit and the ability to repay should be able to refinance. Lenders are reporting that during the Covid-19 crisis their processing time is taking longer but they have implemented procedures to safely facilitate the application as well as the appraisals.
While homeowners with an FHA loan are available for a streamline process because FHA is already insuring the mortgage to be refinanced, the cash-out is limited to $500. Even though the owner may not be able to pull funds out of their FHA equity, refinancing may lower their payment and therefore, lower their expenses.
Unlike conventional loans that require income through a job or other sources, refinancing an existing FHA loan does not require income verification or an appraisal. The borrower cannot be delinquent on their current FHA loan and it must be at least six months old. The refinance must reduce the current interest rate or term or both.
Another alternative for homeowners is a HELOC, home equity line of credit, where you do not incur interest expense unless you actually draw on the line of credit. It will be a variable rate home equity loan similar to a credit card letting you borrow up to a specific limit when you want and repay it slowly over time.
Refinancing a home incurs closing costs which can be paid in cash or added to the financed amount. The breakeven point to recapture the cost of refinancing is determined by dividing the monthly savings into the cost of refinancing. If you stay in the home less than that time, refinancing could be an unnecessary expense.