Is your condo in a bubble?
By now, you probably have an idea about the state of the real estate market.
You probably also have a fair amount of debt to pay down.
And you probably think it’s a good idea to get into some kind of refinancing.
But what if your condo is in a market that is so overvalued that it’s worth nothing?
If you’re reading this, you’ve probably been in one of those markets.
You’ve been forced to sell your condo, because you’re trying to refinance or sell a house to pay off debt.
That’s a common experience for homeowners.
The problem is that refinancing and selling aren’t cheap.
The average amount you’ll pay for a loan with the most popular rate, 5.4%, is $1.25 million.
That figure is for a one-year refinancing with a 30-year term.
But you can pay that off in 10 years, which is about $50,000 less than the average refinancing fee.
If you were able to refight your condo or purchase a new one, the difference between that and what you paid for it would be about $40,000.
But even if you sold your condo and bought a new home, you’d pay about $60,000, or about half of the average loan.
But it doesn’t end there.
Even if you were to get a 10-year mortgage, you would still pay about 25% interest on your loan.
You’re paying more for every $1 you pay back than you were paying for it when you bought it.
To be clear, refinancing a loan can make your house more affordable.
It’s not necessarily a good thing.
But it does offer an alternative to buying a home.
“If you could get a better rate and more flexibility with the loan terms, then it makes it easier to sell and refinance your home, because it’s more affordable,” says Paul Henningsen, a senior vice president at Sotheby’s International Realty.
In most cases, refinanced loans are a good way to pay for down payments.
But if your interest rates are too high, you may have to go into default.
And that’s a scary prospect for many homeowners.
“A lot of people are in default because they are struggling with debt, and they can’t refinance,” says Peter Breslin, an associate professor of finance at the University of Southern California.
Breslin says that if a homeowner has a 5.8% interest rate on their mortgage, and pays 5% of their income for every month they don’t pay it, they would have to pay $5,000 a month for their home to be worth $2.5 million.
But that’s not what happens in the real world.
If a homeowner doesn’t pay their mortgage off on time, they’ll eventually default.
“In some cases, they may end up with a $5 million mortgage, but that’s only a fraction of their equity,” Bresling says.
That’s why many homeowners go into debt to make sure they can get out of default.
Even when they are successful in refinance, they often end up taking on more debt than they can pay off.
“It’s just not worth it.
If you don’t get that 5% down payment, you’ll probably have to put your entire equity into that mortgage, so you may not be able to get out,” says Breslins co-author Scott Molloy, a managing director at the real-estate consulting firm Mollow Group.
That puts homeowners at a disadvantage, especially if they have to borrow more money.
If they owe more on a loan than they make, they could get stuck paying back the loan, even though they have the right to do so.
“There’s a very real chance that if you’re in default and you owe more than you make, you’re going to have to take on a higher-risk loan, or you may be saddled with more debt,” says Molloys co-authors, Kevin Gebbia and Jason Krakauer.
The bad news is, refinancings can be risky.
A lender can make a bad loan worse, which could mean higher interest rates, more expensive down payments, and even foreclosure.
“The riskier the loan the more likely it is that you’ll default,” says Hennersen.
And when that happens, you can’t get out on your own.
“We would not recommend that you do that unless you absolutely have to,” says Mark Zandi, chief economist at Moody’s Analytics.
“And when that occurs, there’s no point refinancing if you don, and if you do, the refinancing rate is going to be a lot lower,” says Zandi.
You can avoid the problem of debt in the first place by refinancing your mortgage, says Brega.
You can take advantage of a refinancing loan by taking out an equity loan, buying a mortgage