On December 15th of 2006, Bryant Tutus, wrote a blog on the Real Estate Network "Active Rain" labeled, "Your home is your castle, not an ATM machine!"
Broker Bryant brings up many good points within the article, explaining the cycle that many homeowners get caught up into when refinancing their homes. Many ads will make it look so easy to get that cash that's sitting in the equity of your home for any given reason!
I'm here to tell you that there are pitfalls to this train of thought and you should really THINK about your decisions and work with a mortgage professional that cares if you are deciding to refinance. This article may seem strange, coming from a California Mortgage Broker who refinances clients monthly throughout California. Not really! You see, whenever a potential client calls me to refinance their home, I always ask myself,
"Where's the Benefit?"
What does that mean?
Well, I MUST SEE THE BENEFIT for a client in refinancing their home in order to make a decision to move forward with them in the refinance process. One of the top qualities the mortgage professional you choose should have is the ability to look out for the best interests of you, not our own pocket.
Here is a list of reasons that people choose to refinance their home and my seeking benefit to the loan:
The Right Reasons
To lower your payments
Many homeowners that initially purchased a home a few years ago with little or nothing down may be able to eliminate their second mortgage by "rolling it into one loan" for a lower interest rate, due to recent appreciation on their home. The "blended" interest rate you currently have of the combined two payments may have higher payments than if you obtained one new loan with even a higher interest rate than the existing first loan. Why? Because your second mortgage probably has an interest rate between 8-12% right now.
To pay off credit cards
Credit cards in the 18-21% range can make it very difficult for homeowners to "keep up!" But, I tell my clients that they must seek out a better solution to their credit card usage after refinancing to pay off the debts. Otherwise, you have now eliminated $20,000 in credit card debt through the refinance and you're going to repeat the cycle again to replace the eliminated debt. Plus you now have the higher balance on your home loan. Not a good cycle to get into!
To repair or remodel your home
I think this is a great reason to refinance. You are putting the equity of the home back into the home. With Spring around the corner, many will start new home projects to fix old appliances or remodel the kitchen. The two major benefits are your increasing the value of the home, often referred to as "sweat equity" and your increased enjoyment in the home.
College Education for yourself or your children
The promise of a better tomorrow and future for the family, through continuing education are always a benefit in my eye.
Medical Expenses
Keeping your health up to date is very important. As I see it, if you are not healthy enough to make an income to support the mortgage payments, then you may not have a home to refinance at some point unless you receive the time to recover. I had back surgery a few years ago and I can totally relate to this topic!
So, what are the wrong reasons?
Here's a few that I've seen recently:
What happens in ? stays in ?! (I've seen this happen)
A spouse that is attempting to "pull cash out", without a spouse's knowledge before a divorce. (I've seen this attempt)
Buying televisions, a spa and lots of "toys" for the home that you could really live without or work to save for.
A trip or vacation. Many can often save up by putting money aside each month to pay for a trip. Treating your home like an ATM for these reasons show little benefit. Certainly, you will be able to find people out there that will help you with your plans, but to work with me...There must be benefit! Otherwise, I'll let you know...
Scott Gormley
Broker/Owner
Oak Valley Mortgage
2006 Chico Assoc. of Realtors Affiliate Chairman
Direct: 530.592.8362
Fax: 530.267.5555
Website: http://www.CALoan.com
Blog: http://www.CALoanBlog.com
"You find the perfect home, we'll find the perfect loan!"
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Hi Scott, I got a Google alert so thought I best run over here and read all the great things you have to say about me. Google alerts are awesome BTW if you are not using them give it a try.
The sellers I had written that post about ended up calling me about 30 days into the listing to take the house off the market. Seems they found ANOTHER LO willing to refinance their house again. They were already in a short sale situation by about $40,000. The refinance will supposedly lower their payment by $38.00 per month, with NO cash out and will raise their debt by about $9,000. Makes a lot of sense doesn't it?