A client of mine received a "Smart Watch Report" from her mortgage lender the other day, and asked me to evaluate it for her.
The report was really an invitation to refinance her current mortgage loan and use her equity interest to either get cash now or sell her home and use the equity to buy a new home.
She made her original 30-year fixed rate loan for $142,000 at 5.5% interest a little more than two years ago. Her principal and interest monthly payment is $806. She has her property taxes and home insurance rolled into the loan, making her actual monthly payment $1,014, or $208 more.
Her appraisal at the time of the loan was $200,000 and her mortgage lender set the estimated current value at $253,000, giving her an estimated equity of $114,000+. Her principal owing at the time was $139,000+.
This is what I quickly observed:
1) She needed to buy a new home like she needed another hole in her head, and I told her so. Since she has a fixed income, buying a newer, better home would simply increase her debt and make it more difficult to service the increased debt.
2) While she could refinance her 30-year fixed rate to a 15-year fixed rate loan and save $55,000 over the life of the loan, it would increase her monthly payment for principal and interest to $1,193, an increase of $387 over her current $806 monthly payment.
Rolling her property taxes and home insurance into the 15-year loan would bring her new actual payment to $1,401, again an increase of $387 over her current monthly payment of $1,014.
3) The first offer her mortgage lender made was to do a "cash out " refinance wherein she could get her hands on $89,000+ in cash to fritter away on a new car, vacations and whatever else she did not need. This would be an incredibly dumb move for her to make, and I said so.
To do this her mortgage lender suggested she enter into a new 30-year fixed rate loan at 6.750%, a full 1.25% greater than her current loan. Her APR (annual percentage rate) would be 6.980%, or almost 7%.
Her new payment for principal and interest would be $1,477, or an increase of $671 over her current $806 monthly payment for principal and interest.
Rolling her property taxes and home insurance into the new 30-year loan would bring her new payment to $1,685, again an increase of $671 over her current monthly payment of $1,014.
Should my client take the lure of getting her hot hands on an extra $89,000+ in cash she would pay dearly for a really stupid financial decision.
The mortgage lender that suggested this option in their "Smart Watch Report" could really care less whether my client went into more debt and may not be able to meet the new obligations should she take the "cash out" refinance.
The mortgage lender could not care less if my client dropped dead. The lender still holds the paper on the property (they own it until the current loan is paid off in full) and could easily sell the property to recover its original $142,000 investment while still making a huge profit in the process.
Is what the mortgage lender is offering my client a responsible thing to do? You decide. I fail to see how loaning my client more money at a higher interest rate and increasing her debt is helping her. It would in fact hurt her.
Borrowers do not understand that when they take out a 30-year fixed rate mortgage loan they become an employee of the company lending the money. Teasing the lender with a "cash out" offer that could easily drive them into bankruptcy is hardly a responsible act by any lender, much less a leader in the marketplace.
This is the point and purpose of writing this article and posting it on the Internet: Since when is helping a financially desperate person—or any borrower for that matter—made better by driving them deeper into debt, leaving them as ignorant as you found them, and lining your pockets at their expense?
http://ezinearticles.com/?Mortgage-Lenders-Act-Like-Your-Friend-in-Need,-But-Seek-to-Line-Their-Pockets-at-Your-Expense&id=694078
