Often times when I have gone to a closing in the past few years, and the buyers are closing with 80/20 financing, when the 20% second lien papers are being signed at the title company by my buyers, the question arises about refinancing the second lien mortgage in the future, mainly because 1) the interest rate is higher on the second lien, and 2) the second lien mortgage is usually a 2/28 mortgage. The interest rate on the second is fixed at the higher rate for the first two years, and then will readjust for the start of the third year... and the rate will change... perhaps increase.
When the buyers ask about refinancing, it is usually explained by the title company closing person that there is a prepayment penalty that the lender will charge IF the second lien loan is refinanced during the first two years it is in effect. Usually the buyers have known about this... hopefully being informed of it when they made their original loan application.
When this subject is discussed, I usually suggest that IF the buyers want to refinance somewhere down the road in the future, that they check with me first before they sign their final refinance loan papers, or, better yet, that they check with me before they even make loan application on their refinance. The following story is the reason I make that suggestion:
I had a client perhaps four years ago that purchased a home using my services. The original amount of the loan was $220,000. They called me, wanting me to help them sell their home in Frisco, Texas. They wanted to move to the Baltimore, MD area. The wife had already taken a job there, and hubby was left down here in Texas to take care of the sale of the house.
The home they bought was the "model home" of a local builder, and as such, it had lots of goodies in it. We negotiated what we thought was a good price for it, and they closed, happy as clams.
In getting on with the discussion in listing their home, one of my questions, of course, when getting their current mortgage loan information, was... what was their current loan balance? Well, to my dismay, hubby told me their current loan balance was approximately $232,000. A full twelve thousand dollars ABOVE what they originally paid for the home. I almost fell out of my chair... although I was able to keep my dismay to myself rather than telegraph it to my seller. He went on to say that he had refinanced only four months earlier. He told the lender that he wanted to refinance, but did not have the money to pay the closing costs on the new refinance loan. The lender gave him the ol' "no problem" routine, and told him he would "roll the closing costs into the note."
Bottom line, the market had "tightened" since they had purchased their home, and I was fearing we might not be able to net them the original $220,000 they had paid for it. Now... they were "needing" to net another twelve thousand dollars to get themselves out of Frisco, TX and up to Baltimore, MD.
As you might be guessing, things did not go well. They did not have the liquid cash money to bring to closing to make up for any shortgages, so the home just sat, and sat, and sat. My seller felt pretty helpless. We tried going the "short sale" path, but that didn't work either. They ended up losing their home.
With that in mind, I find myself continuing to suggest to my buyers who close with the above type of mortgage financing... to please check with me before their refinance. What I have done in the past is refer them to three different mortgage loan professionals who may have better options for them when refinancing than to simply "roll in an unacceptable amount of closing costs into their new loan."
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