by Dana George | Sept. 30, 2020
Many or all of the products here are from our partners. We may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page.
Putting money in your pocket only makes sense if you're going to be able to hold on to those funds.
2020 is one for the record books. The unemployment rate hit record highs, while interest rates hit record lows. The stock market rose to record highs, while the hospitality industry struggled through record-low demand.
You might expect that the uncertainty and recession caused by the coronavirus pandemic would have spurred the worst year ever for the housing market. However, the combination of limited numbers of homes for sale and low mortgage rates have pushed home prices up. According to Redfin, the median four-week home sales price on Sept. 13 was up 13% from 2019. If home prices in your area have surged, you may be tempted to cash in. Before you call a realtor, make sure selling is the right thing to do.
Get free access to the select products we use to help us conquer our money goals. These fully-vetted picks could be the solution to help increase your credit score, to invest more profitably, to build an emergency fund, and much more.
By submitting your email address, you consent to us sending you money tips along with products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Statement and Terms & Conditions.
It starts like this: You hear a neighbor sold their home for more than you ever imagined possible. Stories begin to spread about astronomical home prices. You can't help but imagine all that money in your bank account and the things you could do with it.
Unless certain situations apply, you may want to slow your roll. There's no point selling if you wind up paying even more for your new place, or stuck with a property that wasn't your first choice because of the limited inventory. Or, worst of all, stuck with nowhere to live.
Here are some of the conditions that might make selling in a red-hot market worthwhile.
Say you've decided to move to Costa Rica and live on the beach, travel the U.S. in an RV, or sail the southern coast for a few years. Selling your home for a great price makes perfect sense if you don't plan to buy another home right away. Consider tucking the proceeds away in a safe place (preferably one that's FDIC-insured) until you know for certain that your new living arrangement is as wonderful as you hope it will be.
However, if you want to sell your home and purchase another house nearby, you may lose those financial gains as you'll have to pay more for the new house. Prices are up nationwide.
Let's face it, it costs more to buy a home in Chicago, Illinois than in Spencer, Iowa. If you're selling in an expensive part of the country and moving to a less expensive area, the red-hot market will likely work in your favor.
Imagine you live in Chicago, and your home was worth $500,000 last year but is currently valued at $565,000. You move to a city like Spencer (or Kalamazoo, Des Moines, Kansas City, McAllen, or another relatively inexpensive area). You find a comparable home for $300,000. In a situation like this, you're money ahead, even after you've paid the moving and closing costs.
It makes sense to sell your current home and purchase a new property if the interest rate is low enough to offset the new, higher cost of the property in question. Let's put aside the amount you could sell your current property for and focus only on the cost of your dream home.
Last year, your dream home cost $332,000 and the mortgage lenders you checked were charging around 4.5% in interest. If you put 20% down ($66,400) and take out a 30-year mortgage, your principal and interest payment each month will be $1,345 and you will pay a total of $218,872 in interest over the life of the loan.
After a 13% bump in value, that same home is now priced at $375,000 and it's miraculously back on the market. The interest rate is now at 2.99%. If you purchase it for $375,000, put 20% down, and take out a 30-year mortgage, your monthly principal and interest payment will be $1,263. You'd pay a total of $154,750 in interest over the life of the loan.
The home costs roughly $43,000 more than it did 12 months ago. You'd still have to pay closing costs, but the lower interest rate means you'll pay $64,122 less in interest over the life of the loan.
Buying and selling in a red-hot market is fraught with questions. If you don't plan to buy another home right away, will selling now leave you with enough money to finance what you want to do? If you do plan to buy another home, will you be moving to a less expensive area? Or is the interest rate low enough to offset the higher cost? Bear in mind that you're likely to be able to sell your property much faster than you might buy a new one. Try to factor all the associated costs, as well as realtor and closing fees, into your planning.
It's exciting to see your property values soar. The trick is to keep a cool head and make the best decision for your long-term finances.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
The Ascent's in-house mortgages expert recommends this company to find a low rate - and in fact he used them himself to refi (twice!). Click here to learn more and see your rate. While it doesn't influence our opinions of products, we do receive compensation from partners whose offers appear here. We're on your side, always. See The Ascent's full advertiser disclosure here.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2021 The Ascent. All rights reserved.