Beware the Refinance Wolves

I try to look at two or three for-sale houses each day of the week. I have to do so since we buy houses with our investment companies in addition to listing homes. I've been in housing for 40 years; I've never seen such an overabundance of wolves preying on unsuspecting homeowners. What some of these lenders are doing is not only unconscionable, but it's against the finance laws of the State of Texas.

Here's an example I saw recently (one of too many like it). A couple bought a house in a Dallas/Fort Worth suburb in 1994. The house is currently worth between $115,000 and $120,000. According to Texas law, the maximum amount of money that the homeowners could borrow on their property is 80% of value; currently they would only be able to borrow about $96,000. A year ago an appraiser valued the property at $146,000 and they borrowed 80% of that; $116,000. They pulled $18,000 of equity out of the refinance, and the cost of the refinance was in excess of $8,000. Here is the worst part: they went from an interest rate of 7 1/2 percent up to a new interest rate of 10%. Now they can't afford the payments.

If the house is not worth now what it appraised for a year ago, then the house must've been worth a lot less when the refinance was done. This is predatory lending in its most refined form. Please be very careful about a refinance; most of the time refinances do not make sense, because too often people sell their property not long after they do the refinance. You must live in a house long enough to make up the cost of the refinance with cheaper payments, and this is not the case with the majority of homeowners.