Saturday, December 17, 2016

You Too Can Refinance 100% of Your Home's Value

You Too Can Refinance 100% 
of Your Home’s Value
By Jim "Gymbeaux" Brown, December 15, 2016

You’ve seen the commercials on TV and in magazines where someone suggests that “We’re here to help you realize your dreams by borrowing 100% of your home’s value in order to pay your bills, take a vacation, or whatever else you want to do like spend it on a new car”, blah, blah, blah.”

I fell for that line and have regretted ever since.  If you refinance your home in order to obtain a lower interest rate that is one thing but if you refinance your home to withdraw equity (money) from its value that is entirely a different animal and it IS an animal, a vicious money-eating animal.

Before I explain why, let me suggest that you should ask and have answered a few questions that mortgage loan officers may or may not ask but should:

What is your purpose for wanting to build equity in your home; is it short term or long term?
Do you intend to live in your home for a long period of time?  Long in this case would be for 5 years or more.
Do you intend to pay off your home so that you will not have mortgage payments when you retire?
Do you intend to build equity in order to buy a bigger home or relocate in the future?
Do you currently have sufficient income to pay off your bills as they accrue?

Building Equity:  If your intent is to build equity, you do not want to refinance for 100% of your home’s value as you then eliminate some or all of the equity you have already built up.  The only possible exception to this would be that you have an opportunity to REINVEST the equity in another investment that is guaranteed NOT TO FAIL.  The last time I checked, those opportunities are few and far between if they exist at all and rarely stand up and shout HERE I AM; BUY ME!  Those types of opportunities usually look pretty good AFTER the opportunities to invest have already past.  If your goal is to build equity you want to pay off your home as fast as you can.  As you are paying down your loan, you are building up your equity.  Hopefully at the same time your home is also increasing in market value thus increasing your equity even more.  When you couple these two things you are creating a sizeable amount of equity (money) within your financial portfolio.  For most people their home is their single biggest investment for their future.  The equity could then be utilized to help fund your life in retirement or provide an inheritance to your children or both.

The days of working for a company that provides a retirement income for most people are dwindling for two reasons.  People no longer start at one company and remain there through retirement and secondly more companies have decided it is better to pay people more and not include a retirement program.  The later requires you to invest in your own retirement plans and to do that you have several alternatives.  The first is to build up the equity you have in your home or homes.  The second involves investing a part of  your earnings into retirement accounts.  A third plan would include both the equity in your home as well as a separate financial retirement plan.  Retirement plans could include stocks, bonds, mutual accounts, and any other investments designed for retirement purposes.  But if you are lured into retrieving the equity from your home by refinancing for 100% or even more, you are removing MONEY from your future retirement financial plan and simply extending the time required to continually be making house payments, something most retirees would prefer not to be making.

DO YOU INTEND TO LIVE IN YOUR HOME FOR A LONG PERIOD OF TIME?  This is a question that should be answered when you FIRST finance your home.  Far too often mortgage loan officers simply assume you want a fix rate thirty year mortgage.  Just look around and ask what your friends have done.  Most people do not consider any other alternatives.  In brief, if you know you are only going to be in your home for a short period of time like 3 or 4 years, you may want to consider a variable rate mortgage where the interest rate starts low and increases over time and eventually becomes permanent at a much higher rate at a time when you know you will no longer be in the home.  Therefore a variable rate mortgage might be in your best financial interest as you will be paying less interest for the home while you live there and still increasing your equity at the same time.  Then you sell it BEFORE the interest rate increases to an unacceptable rate.

But…if you plan to live in your home for an indefinite period of time, you probably want or should want more stability in the interest rate you are paying and the total monthly note you are paying (principle, interest, taxes and insurance known as PITI).  In this case you may want a thirty year mortgage at a fixed rate.  Over my lifetime, interest rates have been as low as 2.5% and as high as 21.0%.  Therefore TIMING is critical as to when you buy and what interest rate you will be paying.  If you bought a home when the interest rate was 21% you would be wise to refinance every chance you get to lower it and that may mean refinancing your home every 2 or 3 years as the interest rates drop.  I AM NOT A FINANCIAL MANAGER OR EXPERT.  However, I have been told by people who are that it is probably in your best financial interest to refinance when the interest rate drops approximately 2% over what you are currently paying.  On the surface you would think that any drop in interest rate would be beneficial to you but that may not be true.  There is a cost involved in refinancing and depending upon the market at the time you decide to refinance and incentives being offered by loan companies, that cost could be thousands of dollars in legal fees, appraisal fees, inspection fees, and fees in general. 

If you are planning on living in your home into your retirement years, you probably want to pay off your home as quickly as possible or at least to be near a payoff by the time you retire.  Remember that your income for most people will be reduced upon your retirement and if you did not plan accordingly, you may not have sufficient income to live as you did before and still have funds to pay your existing mortgage.  If that is the case, that may be a reason to refinance for a longer period of time to reduce your monthly out-of-pocket expense of your home.  In an ideal situation you retire and your home is paid off leaving you with only Taxes and Insurance as well as your home’s routine maintenance and improvements.

Another important consideration involves a “what if” situation.  What if you were to lose your primary source of income like losing your job?  If you have refinanced your home and removed most if not of its equity, you no longer have your equity as a potential asset that you can borrow on or acquire through the sale of your home.

EMERGENCIES:  Life has a way of dealing us problems that require money to fix like medical expenses, college tuitions, or just about anything you can think of.  If you find yourself in such a situation, refinancing your home to withdraw equity may be your best or only chance to pay these types of expenses when money is NOT available to do so.  Of course that will dictate your decision.  But even in those cases, I would strongly recommend you get the assistance of a financial expert to help you with finding the best solution. 

Keep in mind that mortgage companies are in the business of loaning money because they make money on every loan they grant; it is called making profits.  Their due diligence is to the mortgage company not necessarily to you the customer because they are in the business of making a profit for the company.  When companies such as you see on TV encourage you to consider refinancing your home for up to 100% of its current value or more they are NOT NECESSARILY making that suggestion because you need it as much as they are planting a seed in your mind.  Just imagine what you can do by extracting the equity in your home; thus making a profit for the mortgage company.  I am not faulting loan officers only suggesting that you look at ALL options available to you - first.

Funny, as I am working on this Nugget the TV is on and in the background I am listening to the THIRD commercial for 100% financing encouraging you to lower your payment, or withdrawing cash to help you with your needs.  It makes me sick because for most people, that is not a good decision as I have explained.

I believe in working backwards to determine your path to reach your goal(s).  For example, if your financial goal is to live and retire in your present home, or even if you want to buy a retirement home in another location, you want to have as much cash available to you as possible.  Building the equity in the home you currently live in is one way to do that.  You can then remain in the home you live in without a mortgage or you can sell your current home and use the equity you have built up to buy your retirement home.

Either way, your equity remains intact and it continues to be an asset for you.  It is simply “money in the bank.”  If you do nothing else, you can always withdraw some or all of that equity by taking out a new mortgage for the amount you need, provided it is less than the current market value of the home, or you can sell your home for its current market value.  I continually refer to “market value” because that is what determines the amount of your equity minus any current loans that may remain on the home.  Market Value minus Loan(s) amount equals Equity.

Your equity can be accessed in several ways, one of which is setting up a line-of-credit on your home with a bank.  The bank agrees to make money available to you that you can withdraw by simply writing a check on your equity.  The interest rates on lines of credit vary with the money market and while this is an extremely easy access to your equity it is also dangerous because of its simplicity AND because the interest rate is more likely to increase than to decrease.  Still it is a great thing to have access to as an insurance policy to available cash - just in case. 

The second way to access the equity in your home applies to people 65 years and older and that is the Reverse Mortgage.  It is too complicated to fully explain but it means that you are selling your home to a bank that pays you the equity you have accumulated in your home in a lump sum or payments over time and you continue to live in the home.  I would strongly recommend you talk with a financial planning expert and your family members instead of getting advice from your neighbors, friends or even a mortgage company none of whom have responsibility for your best interest; especially the mortgage company who wants to make a profit.

I decided to write this Nugget because the barrage of TV commercials encouraging you to refinance your home and withdraw the equity you have accumulated.  They all sound so good and so easy that you begin to think, why not?  There are so many reasons NOT to fall for their ads than there are TO fall for the ads.  Do not think you know what is best for your financial future UNLESS of course you have been trained in such matters and/or have studied and researched the situation.  Get financial help before you make such long-lasting decisions that you will be paying for long into your retired years.

Human nature has proven that most people, certainly not you, tend to spend not only what they make but a little more through the use of credit cards and personal loans.  Credit cards, retail stores and car dealers selling on credit are like a cancer to your personal financial security.  They make it far too easy to spend money that you do not have; much like our Federal Government whose debt may be 20 Trillion Dollars by the time you read this.  Whether it is a home, a car, a coat, a dress, new golf clubs, whatever, how do you know you can afford to purchase the item(s) if you do not have a personal/family budget that provides you with a BOTTOM LINE showing you if you are in PLUS or a MINUS financial posture?  How can you go into a refinancing situation if you do not know your family budget, both income and expenses?  Unfortunately commercial concerns makes it far too easy for you to exceed your budget and you therefore make the sale. 

If you ever priced out a $300 TV set that you finance, you would be shocked at the total amount paid for that $300 TV.  It could approach $700 or more by the time it is paid off.  I found an easy check and balance approach that has stopped me from purchasing “things” by asking a simple question.  How long would I have to work to pay for this $300 TV?  You will be surprised at how quickly that stops you in your tracks from buying the item unless you absolutely NEED it.  Refinancing your home is no different.  How long will it take to pay off my home?  How much interest will I eventually pay to pay the loan off (a staggering amount, sometimes 3 times the original loan amount depending upon the interest rate charged)?  How long will I have to work in order to pay for this home plus interest?  Remember you already have a loan on the home and you have hopefully already built up some equity.  What damage to my equity will refinancing THIS home cost me/our and my/our future(s) if I remove all or part of the equity out of the home in the refinancing process?

I’ve been there; I’ve done that; and, I’ve regretted it ever since!  I will not do it again EXCEPT of course if I am able to refinance my loan in order to obtain a LOWER interest rate PLUS a SHORTER loan period.  And consider this, it does not cost all that much more to finance a home for a period less than 30 years like 20, 15 or even 10; think about it.  Run the numbers, see what works best for you and your family.

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