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Welcome to NerdWallet’s SmartMoney podcast, where we answer your real-world money questions.
The pandemic is changing our financial lives and plans. Seven in 10 Americans say their household incomes have been affected by the COVID-19 pandemic, according to a recent Harris Poll survey commissioned by NerdWallet. So it’s not surprising that most plan to take financial action after the pandemic ends, such as increasing their emergency savings and trimming nonessential spending. We’re also concerned about the home buying process. People worry whether it’s safe to tour potential homes and wonder if they could sell their existing homes. Many aren’t sure they could make mortgage payments or worry about tying up cash in a home purchase.
One of the few silver linings of the pandemic is lower interest rates, which has led to an increase in refinancing and to this week’s question from Sarah. She writes, “My husband and I have been doing a lot of home improvement projects over the last few months, since we've been sheltering in place. And we're also thinking about refinancing. So my question is twofold. Will my home improvement projects help me get a better refinance deal? And is it still a good time to refinance?”
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Home improvement projects almost never turn a profit. In other words, they won’t add more value to your home than they cost. But the right projects could add at least something to your home’s appraised value, which could make refinancing a little easier.
A higher appraised value could increase the amount you can borrow -- within limits. Lenders are being extra cautious right now, so you shouldn’t expect to borrow more than 80% of your home’s value. Also, fewer lenders are approving cash-out loans, or new mortgages that are larger than your old one. You’ll also need proof of steady income along with decent credit scores.
If you can jump through those hoops successfully, however, you can score a great interest rate. Interest rates are near historic lows and likely to stay down for a while as the effects of the pandemic ripple through the economy. You can opt to refinance to a shorter loan term, such as 15 years instead of 30, to get out of debt faster. Or you can opt for a 30-year loan to get lower payments and more flexibility: You can make additional principal payments to get out of debt faster, or keep making the lower payment if you lose your job, your income drops or you suffer any other financial setback.
Temper your expectations. Your home improvement projects won’t add more value to your home than they cost.
Now is a great time to refinance. If you have at least 20% equity in your home, good credit scores and a solid income, you can score a great rate.
Get a refi deal that makes sense for you. Locking in lower payments can give you more flexibility if you lose your job or have other financial setbacks.
More about mortgage refinance on NerdWallet:
Sean Pyles: Welcome to the NerdWallet SmartMoney Podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money. I'm your host, Sean Pyles.
Liz Weston: And I'm your other host, Liz Weston. As always be sure to send us your money questions, call or text us on the nerd hotline at 901-730-6373 that's 901-730-NERD. Or email us at [email protected].
Sean: And while you're at it, please rate, review and subscribe wherever you're getting this podcast. This episode, we're going to talk with our resident home buying pro Holden Lewis about whether home renovation projects will improve your mortgage refinancing chances. — and if it's even a good time to refinance anymore. But first for the "This Week in Your Money" segment, Liz and I are going to discuss some interesting insights about how folks are managing their finances as a result of the global pandemic.
Liz: NerdWallet commissioned a Harris poll survey of more than 2,000 adults. And we found some pretty interesting things. First off, our incomes have really taken a hit. Close to seven in 10 Americans say their household income has been negatively impacted by COVID-19, including 80% each of millennials and Gen Zs.
Sean: Another thing we found is that a lot of people are worried about home buying. About three-quarters of Americans say that they [would] have concerns about buying a new home in 2020 due to the pandemic. Another top concern is the ability to safely tour potential homes followed by the ability to sell their current home.
Liz: Finally, three quarters of Americans plan to take financial action after the pandemic ends, such as saving more in their emergency fund or spending less on nonessentials.
Sean: All of these seem pretty consistent with trends that we've seen online and conversations that I've had with friends and family across the country, especially the income one. I know so many people who are almost entirely out of work have been trying to find new sources of income. And I've had some really hard conversations with friends who were saying, "Hey, I don't really know what to do because I'm not making as much. And guess what? It's going to be six to eight weeks until my unemployment check comes." So this really hits close to home. And I wish I had a better answer for people because we can't just say, "Oh yeah, go and get a side gig." We know that isn't really a feasible option for a lot of people. I'm wondering how you're having those conversations. And what advice do you have for people, Liz?
Liz: Well, four of the most useless words in the English language are, "I told you so," and unfortunately, I'm seeing a lot of that on social media and elsewhere, people saying, "Well, you should've had an emergency fund." There are reasons why most people are living paycheck to paycheck. It's a structural thing. I mean, incomes have not kept up with expenses. There are all kinds of things going on. So, the fact that people don't have an emergency fund that will last them through however long this is going to take shouldn't be a big surprise. One of the things I hope people will keep in mind is that we don't know how long this is going to last. And it's perfectly natural and human to be optimistic, and to hope that the economy will just spring back to life. But the reality is with past severe recessions, it's taken a while to play out. So I think the smarter course, or maybe the more conservative course is to simply expect this to go on for a while, however that plays out in your financial situation.
Sean: Right. I mean, it's interesting that while people are taking a hit to their income, people are still trying to do other things like, as we saw trying to buy a home, which I was really surprised by. I had initially been planning to begin my home buying process toward the end of this year. And now that's on hold for me in part, because as we found, 34% of people are worried about being able to safely tour homes. And I totally fall into that camp. I don't really like the idea of going into a stranger's home right now, not knowing what people are doing. And I also, because we don't know how this is going to play out. I also am just wanting to save and hold onto the cash that I do have just in case, because think about how things have changed over the past two weeks, three weeks. We don't know what the next ones will look like. So in a time of great uncertainty, I'm being a lot more conservative right now.
Liz: Well, I kind of fall back on the advice that has served well in previous times of uncertainty, which is you shouldn't be trying to time any market, whether it's the stock market or the real estate market, the best time to buy a home is when you can afford one, and when you can stay put for a while. You may need to stay put for five years or more for the appreciation to offset the costs of buying and selling. So all that boils back to: If this is something that you want to do for yourself, and you feel like you're in a good position to do it, I wouldn't necessarily put those plans on indefinite hold. If you want to wait, though, to get in better financial position, that totally makes sense to me.
Sean: Yeah, but at the same time, it's actually been a better time to stay a renter, if you want to do that, and you're not so certain or in a great place to buy a house. I have friends in Berkeley, friends in New York who have seen rental prices go down. So at the same time, yeah, maybe you want to buy a house, but also maybe you could save some more money right now by getting a less expensive rental and build up more of a down payment.
Liz: Instead of creating more households, we've been consolidating households. People are moving in together, people going home to stay with their parents. So that makes total sense that the rental market would be better. And actually there's a lot of advantages to renting, especially if you don't know where you're going to be in a couple of years. Renting is not throwing money away. It's buying freedom. You can pack up and take off, as soon as that lease is out.
Sean: It's all a matter of your own personal priorities and where you want to put your money. Which brings me to the other insight that we raised, which was post-pandemic plans. Three-quarters of Americans plan to take financial action after the pandemic ends like saving more and spending less on nonessentials. First of all, I'm wondering what our listeners' plans are. So I want to put out a plug, listeners, if you have any interesting post-pandemic plans, please let us know, send an email to [email protected] and share what you think you might want to do after the pandemic financially. I'm really curious about that, but I'm still trying to figure that out for myself too, because I had this idea in my head of, "Oh yeah, I'm going to begin looking for a house. And my partner and I were going to begin renting out the one that we were living in now." And now we're kind of thinking about finding a house in the country, somewhere in Oregon, getting a big plot of land and making it a little co-op or something. I don't know. Maybe it's the survivalist in me coming out. But has the pandemic changed any of your plans, Liz?
Liz: Well, I was a bit of a prepper to start with. I have to confess that and — not that I have a bunker, I do not — but we have taken the slack out of a lot of systems. You know that just-in-time thing, where the food was arriving just before it was sold to people in grocery stores. We saw how those supply chains can get disrupted and how unnerving that can be for people who have grown up always being able to get whatever they wanted, essentially. And then Amazon comes on the scene and not only can you get everything you want, you can get it the same day delivered to your porch. We got used to there being a system where we could get everything that we wanted.
One of the big takeaways for me for this whole thing is that you need to build a little slack into your own personal economy, whether that means having that emergency fund that you can eat — having at least a couple of weeks of meals stored in your pantry and managing that, or having money in the bank to tide you over setbacks — we generally recommend people have a baby or a starter emergency fund of 250, 500, 1,000 bucks. But over time, you do want to build up something more because periods of unemployment can happen to anyone.
Sean: Right. For me, it's been a lot about how I can up my self-reliance through savings, through improving the place where I'm living right now and doing what I can to feel secure here, whatever that means.
Liz: And your little victory garden. That's part of it too.
Sean: I'm loving my garden. The tomatoes are coming up pretty well. So fingers crossed. But speaking of homes and gardens, a lot of people have been putting more time and money into their homes lately, which leads to this episode's money question, which comes from Sarah. Liz, will you please read Sarah's question?
Liz: She says, "My husband and I have been doing a lot of home-improvement projects over the last few months since we've been sheltering in place and we're also thinking about refinancing. So my question is twofold. Will my home-improvement projects help me get a better refinance deal? And is it still a good time to refinance?"
Sean: That's a really interesting question. I've been doing a ton of stuff around the house as well. My partner and I put in a whole new garden in the back. And I didn't even think to connect that to our refi deal, which we just finished. So I am looking forward to getting the answer to this.
Liz: Yeah, me too.
Sean: All right. Well, to help us answer Sarah's question on this episode of the NerdWallet SmartMoney Podcast Liz and I are talking with our go-to home buying pro Holden Lewis about whether all of those home-improvement projects can help you nab a better refinancing deal. And if it's still a good time to refinance.
Liz: Let's get to it.
Sean: Hey Holden, welcome back to the show. So happy to have you on.
Holden: Hey, thanks guys. It's always a pleasure.
Liz: So Holden, our listener Sarah has a two-part question for you. First, she wants to know if her recent home-improvement projects will help her refinancing prospects. And if it's even a good time to refinance a mortgage. What do you say about the first question?
Holden: One thing that I want to kind of get out of the way is that as an HGTV viewer of shows like "Love It or List It," they're a little bit misleading in that they make you believe that if you pay, say $40,000 for renovations, that will increase the home's value by $50,000. That just doesn't happen. Usually you're going to spend more than you're going to get back in terms of increased home value. But I mean, that's no reason to skip renovations. You do renovations because you want to enjoy your home.
Liz: Yeah. It's more like a consumption thing than an investment thing. And I think that's something that those home improvement shows really gloss over or give you the wrong impression. Most home improvement projects just don't turn a profit. And some of them don't even make financial sense, right?
Holden: Let's say you add a second story to a home where all the other houses in the neighborhood are one story. You're kind of wasting your money. You're not going to get a whole lot of value out of that added story to the house. It's better in that case, if you want a two-story house to sell your one-story home in a one-story neighborhood and go find a two-story home somewhere else.
Sean: I've got to say I feel really misled, though, because I also love "Love It or List It" and all of those shows and you see the tally of how much they're going to be getting back based on what they've been putting into it. And I thought that's how it worked. I thought it was a pretty clear-cut exchange. So first of all, thank you for debunking that, but I am wondering, are there any sort of easy, small home improvements that you can do that will make your home value go up? Like, a bucket of paint for 50 bucks will maybe make your house like $50,000 more valuable. Is that possible at all?
Holden: There are a few small things you can do that really will have an outsized impact compared to the money that you spend to have it done. One is just landscaping, planting flower beds. Maybe if you have really tired shrubbery, planting new shrubbery, getting the trees trimmed, that kind of thing. That can actually add more value to your house than you spend on it because it increases that curb appeal so much. And then inside the house, yes, Sean, you mentioned paint; man, paint has a good return on investment, painting the walls and also refreshing the floors. If you have worn carpet, ripping that out and replacing it with something else. Those kinds of renovations, they really can get you most of, or even a little bit more than you spend on them, and de-cluttering, man, just declutter, get rid of your stuff if you have to put it in storage.
Sean: But in terms of refinancing, I'm wondering how these improvements might connect to that. Is that in the appraisal that someone would say, "Oh, hey, beautiful flowers. I'm going to give you a great deal on your refi." Or how does that work?
Holden: For a lot of refinances, they are going to want to appraise the home. And if you have made renovations that improve the home, it will most likely increase the value of your home. And that's a good thing when you're refinancing.
Liz: We had a drive-by appraisal for our most recent refinance, and that's the first time that's ever happened. But if that's something that you're dealing with, maybe you want to reach out and get a more thorough appraisal. If you want those home improvements to be incorporated.
Holden: That's right. If the lender is saying, "Oh yeah, we don't need to do an appraisal or we'll just do a drive-by and someone will peer through a window." You can always ask, "Hey, can you do something more thorough than that?" And see what they say. I want to add one other thing. FHA and VA loans, they have these things called streamline refinances. The main reason it's a streamlined process is that they do not require appraisals. So you're refinancing from one FHA loan into another or one VA loan into another, and if it's a streamline, you don't have to get [an appraisal]. Well, if you're in that situation, you can always say, "Hey, you know what? I don't want to streamline. I want the new value basically of my house, post-renovation, to be appraised."
Liz: And something renovators also should keep in mind because this has come up with our last couple of refinances is that the projects need to be done. They're asking about that. They don't want to have an unfinished project because that actually decreases the value of your home rather than increasing it, right?
Holden: Right. They just want to make sure it's finished and that the home is habitable. They don't want an unfinished job just to be lingering there when they're giving you a brand new loan on the house.
Liz: Yeah. Something for all those DIY folks to keep in mind. No dangling wires.
Sean: Well, Holden, I want to get to the second part of Sarah's question, here is now still a good time to refinance a mortgage or has that window passed?
Holden: This is a great time to refinance because mortgage rates are basically at historical lows and they have been all of April, all of May going into June, just really, really low. You can get a 15-year mortgage for like 2.5% to 3%. You can get a 30-year refinance at around 3%, maybe a little bit less, maybe a little bit more. These are wonderful interest rates to refinance that. And a lot of people are doing it.
Liz: I remember that when rates really started to drop, there was such a rush of applications that lenders actually were trying to discourage people from refinancing. Is that still the case?
Holden: That's not the case anymore. And yes, that was happening in February and into March, when interest rates fell so precipitously that lenders had more refinance applications than they could handle. And so they were doing all sorts of things. The main thing they were doing was not lowering rates as much as they could have, just to fend off the hordes of refinancers. But they processed that big lump through the pipeline, they've processed those. And so lenders are accepting refinance applications and things should go fairly smoothly. I don't think that there's a whole lot of delays happening. One thing to keep in mind though, is that refinance applications are strong, but so are purchase applications. This might be shocking to a lot of people, but home buying is happening at a pretty rapid pace, especially with new homes. And so, mortgage lenders, they're dealing with a lot of mortgage applications. So yeah, it might take a little bit longer than usual or maybe not to get your loan processed, really kind of depends on the lender.
Liz: And we've also heard that lenders are getting stricter, is that right?
Holden: Lenders are definitely getting stricter. One of the things that they're strict about is the credit score. Ideally when you're refinancing, you have a credit score of 740 or higher. I mean, they will refinance with a credit score lower than that, but they're looking for those high credit score applicants. They're really reluctant to lend for more than 80% of the home's value. So let's say you have a home worth $100,000. They just don't really want to refinance for more than $80,000 on that house. Just keep that in mind.
Sean: I want to talk about some pros and cons of refinancing. I mean, obviously the pros, you can get a lower monthly payment, but what sorts of other pros do you see that people might not expect? And what are the cons of this as well?
Holden: Well, the pros are, of course, as you mentioned, getting a lower monthly payment, that's a real biggie, but you can also let's say drop your mortgage insurance while you're reducing the interest rate. You might have an FHA loan where you can't get rid of the mortgage insurance without refinancing. So let's say you have an FHA loan. You have more than 20% equity. Well, you can refinance lower rate and get rid of that mortgage insurance. You can switch from an ARM to a fixed-rate loan. If you think you're going to be staying in the home for a really long time, or you could replace the 30-year mortgage with, say, a 15-year loan at an even lower interest rate, which would raise your monthly payment, but result in less interest paid over time. As far as cons, well, I just don't think it's a good idea to use a 30-year mortgage to refinance a loan that you've had for more than five years or so.
So let's say you have a 30-year loan, you've had it for seven years. You have 23 years left. I'm reluctant to tell people, yeah, refinance straight into another 30-year loan and start all over with that 30 years because you're going to end up paying a lot more in interest over the life of the loan, even though your monthly payments are going to be lower.
Liz: I understand that. I take a kind of contrarian point of view, which is that it can really help to have the lowest possible monthly payment in case something goes wrong. We're in a global pandemic, there's unprecedented unemployment. I'm getting tired of that word unprecedented, by the way. But it's true. We don't know what's going to happen.
Holden: Everything is unprecedented.
Liz: Everything is unprecedented, yeah, so everything is awesome. Everything is unprecedented. You might want to have that lower monthly payment. So what might be an alternative, and I understand you don't want to be in debt forever, you don't want to be carrying a mortgage into retirement, particularly — for most people that's a really bad idea — but maybe get the 30-year mortgage, but pay it off as if it were a shorter loan? So that way you have the flexibility of the lower payment, if you should lose your job, but you also have the ability to get out of debt faster. What do you think about that, Holden?
Holden: I think that's a really great point. I mean, let's say you want to pay off that mortgage in 15 years. Well, you could get a 15-year loan to refinance into a super low interest rate. That's great. But as you pointed out at that point, you are locked into making those monthly payments that are pretty high. And so, yes, you can refinance with a 30-year mortgage and then you can ask the lender, "Hey, what would my payments be if I paid this off in 23 years instead of 30?" And then, when you can afford it, make those payments. But in times of what is less than plenty, fall back to making the minimum payments on a 30-year loan. So yes, getting a 30-year loan can give you that flexibility.
Sean: Well, it seems like the answer to Sarah's questions are one, the home-improvement projects maybe won't improve things all that much in terms of the refi deal. But that right now is a great time to refi if you qualify. But make sure you got in the deal that's right for you, so you can be stable over the long term. All right, well, now let's get into our takeaway tips. First up, temper your expectations. Your home-improvement projects probably won't improve your refi chances, but they might help you increase your home's value at least a little.
Liz: Number two, now is a great time to refinance if you can. Lender standards are higher, but rates are at or near historic lows.
Sean: Lastly, get a refi deal that makes sense. You don't want to be in debt forever, but locking in lower payments can give you more flexibility if you lose your job or have other financial setbacks. And that is all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us your questions at 901-730-6373 that's 901-730-NERD. You can also email us at [email protected] and visit nerdwallet.com/podcasts for more info on this episode, and please subscribe, rate and review us wherever you're getting this podcast.
Liz: And here's our brief disclaimer, thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This Nerdy info is provided for general educational and entertainment purposes, and may not apply to your specific circumstances.
Sean: And, with that said, until next time, turn to the Nerds.