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Refinancing With Your Eyes Closed.

Often times when I have gone to a closing in the past few years, and the buyers are closing with 80/20 financing, when the 20% second lien papers are being signed at the title company by my buyers, the question arises about refinancing the second lien mortgage in the future, mainly because 1) the interest rate is higher on the second lien, and 2) the second lien mortgage is usually a 2/28 mortgage.  The interest rate on the second is fixed at the higher rate for the first two years, and then will readjust for the start of the third year... and the rate will change... perhaps increase.

When the buyers ask about refinancing, it is usually explained by the title company closing person that there is a prepayment penalty that the lender will charge IF the second lien loan is refinanced during the first two years it is in effect.  Usually the buyers have known about this... hopefully being informed of it when they made their original loan application.

When this subject is discussed, I usually suggest that IF the buyers want to refinance somewhere down the road in the future, that they check with me first before they sign their final refinance loan papers, or, better yet, that they check with me before they even make loan application on their refinance.  The following story is the reason I make that suggestion:

I had a client perhaps four years ago that purchased a home using my services.  The original amount of the loan was $220,000.  They called me, wanting me to help them sell their home in Frisco, Texas.  They wanted to move to the Baltimore, MD area.  The wife had already taken a job there, and hubby was left down here in Texas to take care of the sale of the house.

The home they bought was the "model home" of a local builder, and as such, it had lots of goodies in it.  We negotiated what we thought was a good price for it, and they closed, happy as clams.

In getting on with the discussion in listing their home, one of my questions, of course, when getting their current mortgage loan information, was... what was their current loan balance?  Well, to my dismay, hubby told me their current loan balance was approximately $232,000.  A full twelve thousand dollars ABOVE what they originally paid for the home.  I almost fell out of my chair... although I was able to keep my dismay to myself rather than telegraph it to my seller.  He went on to say that he had refinanced only four months earlier.  He told the lender that he wanted to refinance, but did not have the money to pay the closing costs on the new refinance loan.  The lender gave him the ol' "no problem" routine, and told him he would "roll the closing costs into the note."

Bottom line,  the market had "tightened" since they had purchased their home, and I was fearing we might not be able to net them the original $220,000 they had paid for it.  Now... they were "needing" to net another twelve thousand dollars to get themselves out of Frisco, TX and up to Baltimore, MD.

As you might be guessing, things did not go well.  They did not have the liquid cash money to bring to closing to make up for any shortgages, so the home just sat, and sat, and sat.  My seller felt pretty helpless.  We tried going the "short sale" path, but that didn't work either.  They ended up losing their home.

With that in mind, I find myself continuing to suggest to my buyers who close with the above type of mortgage financing... to please check with me before their refinance.  What I have done in the past is refer them to three different mortgage loan professionals who may have better options for them when refinancing than to simply "roll in an unacceptable amount of closing costs into their new loan."

Comment balloon 22 commentsKaren Anne Stone • August 25 2007 04:05PM

Comments

KAREN:  I must admit that I was a lot looser with what I thought that people should do before this mortgage issue, but now I really feel like they need to get back to doing what is actually practical versus what is possible, although I believe that the mortgage industry is starting to close the gap between the two by default.
Posted by Adam Waldman, Realtor - Long Island (Westcott Group Real Estate Company) about 11 years ago
How many times I have gone to a past clients home to list it and found the same thing...I tell them when they buy, I tell them at closing, I tell them in my newletters, I tell them and tell them.  Then I go to list their home and find that a "friend" had helped them refi...The last time this happened was a couple of months ago with good friends who have a special needs child.  They needed to get into another school district and when I pulled the information it turns out a good friend had refi'd them into a loan with a prepayment penalty of 10k on a home worth 200k...I was thinking about tar and feathers....
Posted by Steve Prewitt, Colorado Springs Real Estate (RE/MAX Advantage) about 11 years ago

Karen Anne, all I can say is Oy! What a sad story, whether we have heard versions of this before or not. It sounds like your clients are very lucky to have you on board for them; I guess unfortunately, we still can't prevent all catastrophes like this but at least we can try to make them more aware!

I wouldn't expect anything less from a fellow Clevelander :-)  I'm so glad you are now blogging!

PS: I will answer all the questions you had for me on my post but first I have to eat lol 

Posted by Carole Cohen, Realtor, ePRO (Howard Hanna Cleveland City Office) about 11 years ago
What I could have said more succinctly was, I will be back!
Posted by Carole Cohen, Realtor, ePRO (Howard Hanna Cleveland City Office) about 11 years ago

Karen Anne, you taught in my favorite neighborhood, Tremont. I did not teach until I moved back to Cleveland - I have to admit I am SO much happier in real estate although I loved the students....I taught high school social studies. The Catholic Diocease has consolidated a lot here, and yes, closed a lot of schools. LB is still involved in the upper echelons of Howard Hanna SC but we don't see him as frequently; Dave Paul too. Luckily, Howard Hanna is still a family owned business.....I'm enjoying it because many of the managers, agents etc did not change with the new name. I'm going to go to the HHSC convention in October (I've never gone to one under any name lol) so I will fill you in on how LB is doing afterwards.

I am truly looking forward to learning a lot about Forth Worth! 

 

Posted by Carole Cohen, Realtor, ePRO (Howard Hanna Cleveland City Office) about 11 years ago
Karen Anne, great post! A wonderful aspect of a buyer or seller having a REALTOR for life is that, that REALTOR is a safety net, an adviser, a friend, who has their client's best interest in mind AND the knowledge to help steer their client in the right direction when they are considering making decisions that could affect them for AT LEAST the next 10 years. I'm just saying that buyers and sellers should have a good REALTOR along with a good lawyer and CPA, so they can go to them for advice before they make costly decisons.
Posted by . . (no thanks) about 11 years ago
Excellent point.  'Think you may have inspired something for me to include in my next "Client Care" update to past clients.  By the way, the next time you have someone moving to Baltimore, Margaret Rome is IN Baltimore, and I cover the area south of Baltimore - about a half hour commute.
Posted by Margaret Woda, Maryland Real Estate & Military Relocation (Long & Foster Real Estate, Inc.) about 11 years ago

Karen - your clients are lucky to have someone as knowledgeable and genuinely interested in their best interest!  I love the story.

Posted by Susie Roscoe, Real Estate Specialist | Brandon, FL (Signature Realty Associates) about 11 years ago

Susie:  Thank you for such kind words.  I think putting my very best efforts in making sure my clients are well taken care of is the only way I could go to sleep at night.  I have always treated real estate this way, and for the nine years I taught junior high school, it was the same.  The kids came first.

By the way, Susie, today I registered for the Tampa Main Event.  I am eagerly anticipating taking it all in a second time.  How great to be spending another three days with such a dynamic, straight-from-the-heart guy named Joe Stumpf.

Margaret:  You know I will send them your way.  And yes, I think my story above would be a great inclusion in anyone's Client Care update. 

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) about 11 years ago
Karen - I hate to see this happen to my clients. You are right of course, and if they would listen to us, we could save them thousands. This is another value added benefit of using a Realtor who really looks out for their clients!
Posted by Paula Henry, Realtor - Indianapolis Real Estate - 317-605-4174 (Home to Indy Team @ HomeSmart Realty Group) about 11 years ago
Thanks for sharing this story...great reminder!
Posted by Diane Aurit, Lake Norman Real Estate (LKN Realty, LLC) about 11 years ago

Paula:  Yes, this is so very true.  The question is... "How do we be everywhere ?"  To me, the answer, or at least part of it, would involve myself as their Realtor making sure that after they close on their home, and they become part of my "After Unit," that I make more of an effort to stay in touch with them.  Newsletters, a note once in awhile, a phone call every three or four months.

I think one thing I am going to do is put together a handout that mirrors my above blog, but does it in such a way that makes it a bit more "owner friendly."  Perhaps if I take it to them personally sometime around the first anniversary of their closing.  Typically, it would be towards the end of the second year that they would be getting thoughts of refinancing.  Perhaps a little "mortgage refinancing class" at that time would be a good thing.

 Diane:  You are very welcome.

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) about 11 years ago

Steve:  It sounds to me that your client's "good friend" who refi'd them wasn't such a good friend after all, but someone who saw a "sitting duck" and took advantage of them.

Bridget:  A great thought.  And... I think that as I begin to follow the systems I learned, or in some cases perhaps reminded of, in the recent Main Event that I attended with Joe Stumpf... it will help me get a lot closer to making that happen.

Carole:  Thanks for sharing.  I look forward to hearing all about your first HHSC convention, and would love for you to share any news from it with me.   Go Tribe !

Adam:  I think that one thing that would help would be that "full disclosure" be done by the mortgage industry in a manner that uses less industry jargon, and more plain, understandable language for the buyer.

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) about 11 years ago
Interesting story.   Makes me wonder if the $12k was actually all closing costs or if they took some equity out as well.
Posted by Seth Callen (Farmers Insurance) about 11 years ago

Karen,

I always cringe when I see a situation like what you described.  I see it more now because of the mortgage industry fall out that is occurring right now.  Too many times a borrower looking for safety, security and liquidity in a mortgage product gets slammed into a product that fits the mortgage professional's pocket as opposed to what fits the CLIENT'S needs.

If you do hold a refinancing seminar, your TRUSTED Mortgage professionals will provide accurate, insightful and TRUTHFUL answers.  I applaud you and your efforts to protect your clients. 

See you here in Tampa in November

Posted by Shannon Barron - Sun Trust Mortgage (Sun Trust Mortgage) about 11 years ago
Do unto others...
Posted by Stephen C. Olczak (Mortgage Help) about 11 years ago

Great post!  Also thanks for your helpful comments on mine 'Attend those inspections'.

Enjoy your Holiday weekend.

Posted by Dionne Morgan, Broker REALTOR ,GRI, e-PRO (Realty World Solano Realty) about 11 years ago

Karen,  As with real estate, the mortgage business is easy to enter.  Very few lenders are actually trained (Knowledge, Skills, Discipline and Ethics) and once the new emplyee orientation is complete, they get business cards and a rate sheet, then out the door.  These "professionals" jump in and  begin to advise people about one of the biggest financial decision they will ever make.  The public actually believes all the advertising from the big impersonal firms (some of which are now closed). but most do not have someone they actually trust to advise them. 

Now that you are part of the By Referral Only community, you can begin to build your team of Trusted Advisors to help all of those who trust you.  It is easy to see that you are truly embrace the "Real Estate Consultant for Life" philosophy.  Keep up the good work and although I will not be at the Tampa Main Event, I know we will run into each other at some point.

Posted by Jim Hogan, Atlanta Loan Source (The Loan Source) about 11 years ago

Jim:   Ah yes... the "professionals."  I usually tell the story about how to sell your home in Texas, an agent must take 180 classroom hours of education, then pass a test.

Carol, the woman who does my hair at Shelton's... had to take 1500 classroom hours of education, then pass a test, to cut or color my hair.  It's another one of those things that make you go hmmmmm.

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) about 11 years ago

Karen Anne, your clients were at the beginning of so many foreclosures that have happened since 2007.  It appears as if there will be many more to come.

Very good first post on Active Rain.

Posted by Bob Willis, Orange County & L.A. County Real Estate Agent (Berkshire Hathaway HomeServices California Properties) almost 8 years ago

Thinking of you resting with your eyes closed as God heals your heart! :) Can't wait for you to be back!

Posted by Joni Bailey, Your Huntsville / Lake Livingston Area REALTOR® (Berkshire Hathaway Home Services - Anderson Properties) about 5 years ago

I have the opportunity to comment on 20 posts so I am working through 20 of yours. YOU SO DESERVE to be a millionaire. 

Posted by Joni Bailey, Your Huntsville / Lake Livingston Area REALTOR® (Berkshire Hathaway Home Services - Anderson Properties) almost 4 years ago

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