Armylifer, I like your advice generally, but have a question for you. You say that refinancing would cause loss of equity. How can that be? Isnt equity simply the difference between market value and what you owe on the property? I do realize a home equity loan would cause a loss of equity, but cant see how a refinance just to get lower rates would. Can you explain that please?
As I said in a previous post, there are a lot of variables to this subject. However, I will use as an example one of my closest friends. I will change the actual numbers to make the example easier to follow.
Dan was an IT professional that I worked with. In 2007 his home was worth $100,000. He owed $80,000 when he decided to refinance to a lower interest rate loan. The bank decided that his equity in the home was marginal and they wanted a current market value for his home. The loan officer arranged for this. The current market value came in at $105,000 making the equity number look better.
Dan got the loan at the reduced interest which gave him a lower payment. However, instead of just owing $80,000 on his home, he now owed the $105,000 loan. The original equity that he had before the refinance was eaten up in fees and points on the new loan. He did not get any cash from the refinance. Sure he had a lower payment but he owed it for a longer period of time than the original loan.
In the year that followed his refinance Dan got laid off from work. He tried to sell his home but the market had crashed and his home could not sell for what the bank had loaned him. His home was foreclosed on and Dan still owed the bank the difference between what the bank eventually sold the house for and what Dan still owed on the loan.
This story is obviously an oversimplification of Dan's situation but it is an accurate one when it is all boiled down. With a little variation on Dan's story, I have seen others lose their homes in a similar way.
One thing about equity is that you never have it until you sell your home. That word is so fluid when it comes to real numbers. Banks want to loan you money so they manipulate numbers to make it look like you have more equity than what the market says you really have. Thay are literally banking on the future value of your home, not the real present value of it.
Even if you do not lose your home because of some unforeseen circumstance, you still do not have one penny of equity until you sell it. As I previously said, there are just too many variables to cover in this post.
