REAL ESTATE

Re-Finance Obstacles

As discussed in Chapter 7 of our publication When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), and several previous blogs, the purchase of a home may be one of the biggest decisions, and investments, to make in one’s lifetime. Over the last few years, it has never been more difficult for young buyers, with rising inflation, property prices, and property taxes/insurance, and the situation appears to be only getting worse, with an increasing number of defaults and loans coming due.

      One major obstacle in the re-financing or purchase of a home over the past few years has been the high interest rates. As we have noted in previous Real Estate blogs, the full cost for a home after an amortized mortgage has been satisfied can be double (or even triple) the purchase price, depending on the length of the mortgage. When interest rates decline, the popular approach is to re-finance the property, to lower the interest payments.

      However, there are points of contention, and restrictions, when attempting to re-finance a property, and some are more obvious than others. The first is the structure of the mortgage following the rate reduction. Does the mortgage reset to the original length? If it does, so does the amortization schedule that applies the most interest, and least principal, beginning with the first payment, thus costing more in the end. Consider making the same nominal payments as you did before the re-finance, and set up the overage to be applied to “principal only.” This will effectively reduce the amount of interest paid, rather than adding to it.

      Additional issues that normally arise with the ability to re-finance include the amount of equity in the property, the current value, structural inspections, changes in income, and more importantly debt-to-income ratios. The re-financing process is basically the same as the original purchase, as it requires employment, financial, and credit information.

      Also, with increasing regulations being implemented on land and property, it is beneficial to learn of any new requirements, or restrictions, before applying for a re-finance, most of which have an attached fee. If new systems have been installed, they need to be properly inspected, and an appraiser will again be required to asses the property.

      One lesser-known issue that may arise is spray foam insulation, which many homeowners apply themselves to plug small drafts/holes around their property, as it is very easy and convenient. Spray foam, unfortunately, can emit toxic chemicals that are unsafe and undetectable. If not properly installed by a professional, a lender may consider the property a safety risk and deny a re-finance until mitigated. Be sure to create a checklist of all requirments and potential issues prior to applying for a re-finance.

      Please visit the website www.augustassociatesllc.com for home values, listings, and professional assistance.