***Thinking About Refinancing? Maybe It's Time to Think Again

Just 25 years ago, most homeowners optimistically counted off the years and months that would pass before they could pay off their home loans. Take out a second mortgage (as home equity loans were then called) - unthinkable! Only dire emergencies could force such imprudent borrowing. That’s why nearly all members of Tom Brokaw’s Greatest Generation crossed into retirement as homeowners, free and clear.nnThen sometime in the mid to late 1970s, banks changed. Loans became products that they wanted to sell. Rather than counsel people against the evils of needless borrowing, bankers blitzed the public. They mass-mailed unsolicited credit cards to people they had never seen or heard of.nn"Spend, borrow; borrow, spend," the bankers urged. "No credit, slow credit, bad credit, no problem. If you own your own home, we've got a loan for you. No equity needed."nnNo wonder that bankruptcies have climbed to levels 10 times higher than they were several decades ago. In a crisis that is on the scale of the better-known foreclosure disasters, the loose-pocketed purveyors of credit are now reaping what they have sowed.nnWeakness of Will and Financial DisciplinennIn adopting the sales approach, the bankers knew that millions of people would jump at the chance to spend and borrow now, and then think about the destructive consequences later.nnBecause let’s face facts. Home equity borrowing vanquishes your capacity to build wealth. If you do use it, use it only for productive investment that offers low risk for good returns. (As the old advice goes, “Never dine on seed corn.”) The data on home equity loans overwhelmingly show that borrowers most frequently put the money they borrow into consumption, including ill-considered home improvements.nnWhat about consolidating your bills or paying off high-interest-rate credit card balances? Again, prudence says no. Rather than paying less interest, this approach often leads to even more debt. Why? Because borrowers who wrap their credit card balances and other bills into home equity loans (or refinances) temporarily minimize the pain of debt. Yet, with a longer term and lower payments, the debt generates higher long-term costs. Even worse, many borrowers run their credit card balances climb right back up to where they were previously.nn“Thank goodness the home went up $10,000 in value last year," they think. But meanwhile, wealth destruction continues.nnBut In Case You Must Borrow . . .nnIf after careful review of the numbers you still decide to load up your home with debt, at least closely examine the terms of your home equity loan (lump sum borrowing) or home equity line of credit (spend your equity directly through the checks or credit card the bank gives you).nnBorrow with the same savvy you would apply to any other home finance agreement that you would enter into. After all, no matter what cute marketing terms the lender coins, a home equity loan carries the same types of terms, conditions, obligations, and rights of foreclosure as does any other mortgage.nnNo, let me revise that statement. Don't merely borrow with savvy; borrow with magnifying-glass scrutiny. Lender hype and fine-print “gotchas” multiply with home equity loans.nnSpecifically, here are several of the more important terms and conditions to watch out for:n

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• ARMS. Adjustable-rate mortgages account for most home equity loans. Scrutinize caps, adjustment periods, and margins.n n
• Teaser rates. Nearly two-thirds of home equity loans start with teaser rates. How long will it last? How high can it jump?n n
• Prepayment penalties. Great teaser rates often come with prepayment penalties. Lenders don't want you to grab a below-market rate for three or six months and then bail out before they've extracted their pound of flesh.n n
• Balloon payments. When does the loan fall due? Is it callable prior to that date? If you want to renew, must you requalify? Must the lender order a new appraisal?n n
• Garbage fees. Usually not as bad as with purchase/refi mortgages, but some lenders will sting you if you're not swatting as necessary.n n
• Maintenance and inactivity fees. Some borrowers set up home equity lines of credit only to be used in emergencies. The lender may require you to either borrow some stated minimum amount, or pay a fee for the privilege of refraining.n

n Note also that an open line of home equity credit - whether used or not - could reduce your credit score. If you plan to refinance or buy another property anytime soon, weigh this borrowing within the context of your total credit profile. Might the credit scoring program judge you to be extending yourself too far?nnn

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nGary W. Eldred, PhD, has been involved in hundreds of real estate transactions as buyer, seller and consultant. He is author of many best-selling books on real estate. Dr. Eldred created The Real Estate Investor Training Program for Trump University.