Captain offers 'first-hand' advice on home refinancing
By Capt. Cooper Steele, Site Activation Task Force
/ Published June 12, 2009
EGLIN AIR FORCE BASE, Fla --
Are you getting ready for a permenant change of station? Do you own your home? Are you going to rent it out rather than sell it? Do you think you will refinance after the move? Think again.
The minute you pull out of your driveway, your refinancing options may evaporate. This is an issue many people are experiencing or possibly will experience in the future with summer PCSs and the current changes taking place here at Eglin. This is my experience.
We purchased our first house near Maxwell AFB, Ala., in 2006 with no down payment using an 80/20 loan from our bank. Both portions of the loan were at a fixed rate and I knew we could comfortably afford the payment until we sold the house before the next PCS. The PCS orders to Eglin came in late 2008. At that point, the real estate market across the country had fallen.
The only equity we had in the house was a very modest appreciation in value. The appreciation would not cover the various fees associated with selling a house, and we would take an overall loss on the property. While we could have absorbed the loss, we decided renting it out would be a better financial decision. This way, we could continue to build some equity while waiting for the market to recover.
The Alabama area is an active rental market and we found renters right away. The rental price did not quite cover our mortgage and insurance payment, but I wasn't worried. With rates approaching all-time lows, we decided to refinance the mortgage and the new payments would be less than the amount we received in rent. This was my mistake, and the mistake was timing.
PCSing is stressful enough, but we were going to compound that with moving, a new job and having a baby - all within two months. Oh yeah, and purchasing a new home near Eglin.
I decided we didn't need to add the stress of refinancing a mortgage to the mix. I was also concerned that having two loan applications at the same time would damage my credit score, thus hurting the rate we wanted for our home purchase here. I decided to wait until we moved and were established in our new home before trying to refinance the old one.
Once settled, I started calling my bank and other lenders. I learned I would not be able to refinance the home in Alabama and I realized my mistake.
Since we no longer live there, lenders now consider our Alabama house an investment property. The banks require a loan-to-value ratio of 70-80 percent for the refinance of investment properties; I'm not even close to that. For properties in this category, a larger down payment is required or a smaller loan amount will be approved.
I was told current federal programs encourage lenders to refinance up to 105 percent loan-to-value for primary residences. If I had refinanced before I left, they would have provided me with a refinance loan.
When my bank classified my former home as an "investment property," it felt as though they thought I was out there gambling on the real estate market. I only chose to rent the property out because that was the smartest financial choice given the market conditions. I failed to realize the implications of waiting to refinance, and I'm now "paying" the price.
Fortunately for my family, we are in a financial position to afford the decisions we've made. This may not be the case for everyone.
I would urge those who are thinking of refinancing to fully understand the implications of saying, "I'll get to it later." With interest rates starting to trend upward and markets beginning to recover, there may be no time like the present.