Thinking About Refinancing? Caveat Emptor!

The Wall Street Journal recently reported that there is a significant overcapacity in the mortgage lending industry.  Why does this matter to you?  Well, there are a few reasons.  If you are buying a home, it is a good time to be able to get a mortgage – and to perhaps negotiate slightly lower fees.  However, if you are considering a refinance – caveat emptor (buyer beware).

One of the first things that lenders do when their volume of loans declines and they have excess capacity, is to ramp up advertising.  So, you may be hearing ads that offer “no fees”, “no appraisal fee”, or “no closing costs”.  Some of these may be bona fide offers – but some may just be hype that ends up in these charges being added to your loan amount or to your new interest rate.

One of the next things that lenders may do is to advertise suggestions for what you might do with the equity in your home that may have grown due to the recent increases in home values and the continuing investment you have made in it by making your mortgage payments or home improvements.  Your home equity is the current market value of the property minus the mortgage owed and minus sales commissions and other costs that you would incur in a sale.

Your home is an investment that offers the opportunity to accrue wealth as the value increases and you pay down the amount owed on the mortgage.  For the sake of discussion, your home is not your new RV, motorcycle, boat or next vacation.  Your home is not your bank.  There is no question that borrowing against your home equity to cover a major medical expense or other major emergency may make sense – and it may make sense to use home equity to facilitate another long-term investment – like a college education for children or grandchildren.  But just consider this:  taking out a 15 to 30 year term mortgage to finance a short term purchase or event is rarely a smart choice.  By the same token, using home equity to pay off accumulated credit card or other short-term debt to get a lower interest rate on it generally only makes sense if you have a budget and a commitment to a plan to avoid incurring new debt – and you can afford the potentially higher payment on your mortgage.

Just a quick word on reverse mortgages:  These complex financial instruments can provide real value and benefit to older homeowners and their family when home equity can help to cover expenses and allow the borrowers to remain in their home.  However, again, your home is not your bank.  The reverse mortgage is not for everyone and requires consultation with trusted family members and/or financial professionals.

How to make a good decision about borrowing using your home equity?  First, be sure to understand whether the person or entity providing advice to you has a vested-interest in making a loan to you.  If s/he will earn a commission or other incentive from making a loan to you, sadly, your best interest may not be their first priority.  Second, ask your loan officer or the lender to provide a net tangible benefit analysis.  This will show you how much the costs of the transaction and the increased loan amount, if applicable, will cost you and how long it will take you to “break even”.  Many states require this when you are doing a refinance – and many lenders routinely provide it even if it is not required.  If your lender does not offer it – or cannot provide it upon request – it might be in your best interest to find another lender.  Finally, remember that for most of us, our home is our largest asset and is our best investment for accumulating wealth.  So, use extreme caution when you hear the enticing ads offering you a new loan.  The lender who has excess lending capacity or the loan officer working desperately for another commission may not have your financial interest as their priority.  Your home is your home.  Consider and protect it as such – listen carefully to ads and take steps to ensure that undertaking a major borrowing against your home will be beneficial to you and your family.  You may also want to seek pre-purchase or financial counseling from a non-profit organization that specializes in giving homeowners this type of advice.  You can look for resources in your area at HUD Approved Housing Counselors.

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For more information on the benefits of AHA membership, contact Rod Luckhart.​