Buy or refinance? Torn between 2 good choices


Many Maryland homeowners are stumped.

On the one hand, they could take advantage of low mortgage rates to refinance. On the other, they could use the low rates to buy a better home.

A Columbia couple in their early 30s -- she's a sales executive with Xerox, and he's a human resources specialist for Procter & Gamble -- have been in this quandary for four months. They're torn between refinancing and selling their contemporary town house in favor of a home with a bigger yard where their 2-year-old boy could frolic.

"We just don't want the interest rates to go by us," says the wife.

If they refinance, they can reduce the payments from their current 10 percent mortgage. If they trade to another home, the low rates will let them buy more house for the same money. Two good choices make it tough to decide.

"The whole nation is marching in place right now. Indecision is holding back a lot of market movement," says Carolyn Janik, the author of several books on real estate.

Many homes are moderately priced now -- another factor that tempts owners to trade properties, Ms. Janik points out.

"Maybe they want to live in the suburbs instead of the city. Maybe they want another bedroom. Or maybe they're dreaming of a bathroom with a tub for two, hanging ferns and a skylight," she says.

Tempering the excitement about trading homes, however, is the reality that -- for most people -- selling the old place is a necessary prelude to buying another. And, regrettably, the unloading of property remains a slow and difficult proposition in many communities these days.

Are you caught in this either/or trap? Real estate experts offer these suggestions:

* Pre-shop the market, but don't buy until you've sold your old home.

If you're torn between refinancing and buying, a brief look at the home-sale market could help make up your mind fast.

"Inertia is a powerful force for many people. Looking around may be the catalyst you need to get moving," says Ms. Janik, who recommends you go to a few open houses to see what's available in your price range.

However, while it can be wise to briefly survey the market as a decision-making exercise, it's usually foolish to buy until you've sold, realty specialists caution.

"Don't court financial disaster," Ms. Janik says.

The problem is that it may take months to sell the home you already own. And, as a buyer encumbered by the need to sell House A before you can close on House B, you're in a bad bargaining position on the purchases. Chances are the seller of House B won't want to take a contract contingent on your sale of House A.

Too often, bad timing on a housing transition means the disappointing loss of a house you wanted -- or the still more frightening prospect of facing two mortgage payments at the same time.

"When you go look at open houses, don't bring your checkbook. Buying without selling could cause you to lose your shirt," Ms. Janik cautions.

* Don't trick yourself into thinking you'll want to stay in your home forever if only you add on.

"Self-delusion" is at work many times when people decide to refinance and stay -- on the basis that they'll make a major addition to the home, says Mary Jo Button, a sales manager for Coldwell Banker's Perry Hall office.

"An addition never pays people back, and they just move in three to five years anyway," Ms. Button says.

Spending $20,000 to $50,000 or even more for the addition of a family room is not an unusual move. Frequently owners include a lot of bells and whistles in the new room -- including plush carpeting, lots of glass, skylights and an atrium. They justify the expensive project on the basis that they'll stay forever.

What's wrong with this picture is that usually the new family room alone is not enough to make the owners happy with the house. Shortly after the addition is completed, most remember their other complaints -- the bathrooms are too

small, or the kitchen is outdated -- and they still want to move.

Unfortunately, the sober truth is that your fancy addition can usually be expected to yield just a fraction of your investment at the closing table, real estate specialists note.

"People who buy prudently and move from house to house do better than those who add on. Any agent in this country will tell you that houses with additions rarely, rarely get their money back," says Ms. Janik, author of "How to Sell Your Home in the '90s," a Penguin paperback.

* Call on an accountant for impartial advice.

A real estate agent is likely to steer you to a home change. A mortgage banker will want you to refinance. And a financial planner may direct you away from real estate altogether -- toward stocks, bonds or insurance products.

But many a solid accountant can give you neutral financial advice at a reasonable fee.

An accountant familiar with real estate can estimate both the costs and rewards of refinancing, as well as giving you a good idea of your transaction costs in trading homes.

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