Today I came across an article in Realtor.com titled “how to deal when you’re stuck in your starter home”¹. This struck a chord and spoke to me. My husband and I were literally talking about this exact same topic on our way into the office this morning. We bought our home “starter home” in May 2011. Our intentions were to stay there for a minimum of 5 years, max 7 years. Looking to move or sell after my son graduated high school. We felt this would be the prime opportunity as our youngest would be starting 1st grade( I know, big age gap).
This would leave us with open opportunity. Deciding if we wanted to stay in the same neighborhood, perhaps even the same city. We both work in Denver so it would be a great time to consider moving closer to the office, less commute, save money in gas, HOV, basically travel expenses. Our daughter is just entering her school years so this is a great time to move her into a new area or school. Where she has time to start and grow and meet new friends.
Now, unless you have been living under a rock the past 5-7 years, you know Colorado’s Real Estate market has changed. Saying it’s “changed” is putting it gently. For example, we purchased our house for $203k, which at that time was priced at the top of the market. Meaning, our home had no similar comps being sold at that price, it was the highest purchase price in our immediate area. We were advised against purchasing by a few skeptics. They felt the market will not hold and feared prices will not increase at a high enough rate for when we were considering selling (in 5-7 years). Which we did consider that and looked at the “what ifs” and as you can see we decided to move forward. Glad we didn’t listen to the skeptics because we all know what the market did. It increased exponentially! Our starter home is now valued at $375K. We refinanced last year just to remove our mortgage insurance (MI) and rates were still relatively low. Our remaining balance is $179k.
Given these numbers, it looks like it is an ideal time to consider selling our starter home and moving “up”. We would preferably like something a little more spacious, more open floor plan and more windows. Our home is great, it’s cute, it has plenty of rooms, it’s just not what we would ideally like to be in forever. It is the perfect “starter home”. It is a 4 bedroom (almost 5) two bath, with a finished basement. I say almost 5 because the fifth room in the basement has a closet but the builder who did the “fix & flip” didn’t install the egress window and well size to be considered a bedroom. We have 987 sq. ft. on top and on the bottom, it’s a cute ranch, with a large backyard. It works for us, it’s just a little tight sometimes. It held our whole family (and then some) in it up until last August when my oldest moved out. At one time we actually had all bedrooms filled. It was cozy, no one complained (except maybe my teenage son) who always wants to keep up with the Jones’ of the world.
I love cooking and entertaining, so hosting gatherings such as Thanksgiving takes a bit of creativity. Summer BBQ’s get a little cramped but thankful we have a big backyard. Although that is unfinished, so its a bit of a dirt yard. Another one of those on our checklist we keep avoiding. We’ve just been doing little by little each year and have barely made a dent.
We talked about making a few changes in the home, such as painting. We held off for quite some time because we felt why spend the money if we are going to sell in a few years. The new buyers will repaint anyways. Any idea that comes in our head we always keep holding off because we haven’t been thinking this would be our forever home. If it’s not our forever home why would we want to put money into it or spend money even on new furniture? Which we also need. We keep saying we can wait until we are in our next home, our forever home.
Well, again, if you have seen the Real Estate market, homes prices are still on the rise. To afford a home in Denver (or surrounding metro area), we would need to use ALL of our equity for down payment in order to have an affordable mortgage payment. Even after putting all our equity down we would be looking at homes priced at minimum $500k. For a home price in the mid $500,s we would be making a lateral move from what we already have. We would not be moving up. We would not be expanding. Which means we would need to be looking in the $600’s. At this point, we are practically doubling our mortgage payment (if not more).
After looking through properties and searching and running the numbers we have been at a standstill for the past 10 months. As of today, we have decided to entertain another option. We are going to call in the contractors to see what it would cost to “upgrade” our existing home. Look to see what it would take to have all the items we want in our “forever” home. We may not be here for the next 20 years but we can see if we were to stay even for at least 10 years, what would it take to make it our own. We fell in love with our home because it was a “fix & flip”. The paint was perfect (so we thought), the appliances where new, the carpet was new, etc. After about a year all that started falling apart. The paint chipped if you looked at it, the microwave handle broke after a month, the kitchen faucet handle recently broke last month, our carpet is already worn out, the list goes on. It looked pretty when we bought, but when you buy a fix and flip you don’t get the high-quality upgrades.
So we thought to ourselves, Instead of buying the next “fix & flip”, how about we create what we want. We get to choose our ideal flooring, appliances, paint, kitchen, bathroom, etc. There are two ways we can do this, it can be a construction loan or a renovation loan. We are going to look at our options and see what it would cost once we get a few bids from contractors. We can then look to see which loan makes more sense for us as well as if a renovation or selling/buying makes more sense.
Are you going through the same thoughts? Have you considered a renovation loan? Did you know they existed? There are a few choices. One is an FHA 203k (standard and limited) and Homestyle (Conventional). Both options are great, it all depends on your credit score, the amount you owe on your existing loan and the amount of renovation you are looking to complete. With an FHA 203k, you are able to go to 115% LTV² but can’t go above FHA loan limits. Homestyle you are able to put in 50% of the “after completed” value and can’t go above Conventional (Conforming) loan limits. For us, this means we can go over $200k in renovations and still remain under a $400k loan. Doesn’t that seem crazy? I mean, overall we love our neighborhood, we love our daughter’s school, the location, and proximity to all the stores, restaurants, parks, etc. Plus, even if we did end up selling in 10 years, we would increase the value in our home with the upgrades. Now, one thing to consider is always doing your due diligence. Looking to see if adding this much renovation in your home will you be able to have comparable sales in the area. We are fortunate that only two blocks away there are homes valued in the upper $500’s-800’s. This way when/if you decide to sell you can get your property appraised at that higher value. This is something you can ask a Realtor to help you with prior to starting a big project. You also need to meet with a lender to discuss these types of loans. Not every lender can do them or offer them.
Once you get your bids and have an idea on cost, then you look to meet with your lender. They can run the numbers to make sure you qualify for the increased loan amount and payment. This is not a home equity line of credit (HELOC). The renovation costs will get added to your existing mortgage, it is not a second, it is still your 1st mortgage. You will want to know what this is going to cost you and what your new loan amount and payment will be. This helps determine if you need to adjust your bid by adding/removing items, adjusting design or features, etc. The good thing is with a refinance renovation loan, you have more time to plan and adjust.
As we go through this journey, I will share our story with you. It’s going to be quite a ride so hang tight! If you have any questions about renovation loans and if this is something you would like to consider and look into, please give us a call.
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²https://www.mortgage-maestro.com/disclosures/
