Many home buyers plan on refinancing their homes a year or two after buying them to reduce their house payments. They usually pin these hopes on theirs homes appreciating quickly and then refinancing from a 90 or 100% loan to value mortgage down to an 80% of less loan to value mortgage. This is a very risky move which can easily backfire if refinancing is the only way they can afford to keep their homes.
A couple of my clients have experienced this in the past year. The first client put 10% down and lined up adjustable financing on their 80% first and 10% second mortgages. Their plan (hope) was that the home's value would increase and they would refinance both loans into a single first mortgage at 80% loan to value at an attractive fixed rate. With home values dropping instead of increasing, they are now unable to refinance into one loan at a reasonable fixed rate as the loan to value ratio would be around 100%.
Fortunately, this client can afford their higher house payments as their interest rates adjust upwardly. So while it puts a squeeze on their monthly budget, they are not at risk of losing their home. When assisting them in the purchase of their new home, I did ask what would happen if either property values decreased and/or interest rates increased resulting their inability to refinance as planned. They indicated they would be able to afford the higher payments, though it would stretch their finances some.
Another client called recently because they need to refinance their high interest rate loans on their new home. I was the second agent hired to help them sell their old home after they were already in contract on a brand new home. I was able to facilitate the sale in late 2006, though they netted significantly less than they originally budgeted. The builder arranged 100% financing in the form of an 80% first at over 8% and a 20% second at over 12%. The proceeds from the sale of their old home are subsidizing their new home payments, but will not last much longer.
I put this client in contact with my loan officer who will hopefully be able to assist them, but if not, they are at risk of losing their beautiful new home. The most challenging issue is that the home will have to appraise for 100% of what they paid for the home just under a year ago.
The lesson is that borrowers need to make sure they can afford their loan payments based on the highest interest rates possible with their loan program. They need to ask their loan officers what the highest interest rate could be under worst case scenarios, when that could happen and what the payments would be. If they cannot make this highest possible payment, they should seriously consider NOT using the loan program.
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