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<< Previous   of   Next >>   ADVERTISEMENT   CONTACT THE HERALD Mike Benbow, Business Editor benbow@heraldnet.com   Published: Sunday, December 23, 2007 Purpose dictates refinance decision By Steve Tytler Question: In your Dec. 16 column, you encouraged questioners to refinance a mortgage before the value of their home went down any further. Do you think it is advisable to tell people they should pull money out of their houses in a declining market? You mention that some people will soon be upside down with their mortgages, yet you encourage the questioners to become more at risk of this very situation. Would you also encourage people to walk away from their mortgage? Wouldn't it have been more responsible to ask them what they need the money for? Is it for needed surgery they can't afford or for a vacation or new car? J.K., Olympia Answer: I certainly did not mean to imply that people should refinance their mortgage and pull cash out of their home equity just because. You make some very good points in your letter and I agree with virtually everything you say. I'm glad that your question gives me a chance to clarify my position on this. First, I have taken some heat from a few people who think that I should not be making public predictions that home prices will drop over the next year. They feel that I am needlessly scaring people and hurting the housing market. My response is that I try to tell it like it is. It is not my job to be a cheerleader for the real estate industry. I want my readers to know what is really happening in the housing market, not give them false hope. I don't like to be the bearer of bad news, but I think it's important that home-owners know that we are seeing a drop or at least a leveling off of the market. My predictions are based on more than 20 years of real-world experience in local real estate. I have a pretty good track record of making accurate predictions about trends in the housing market, and I feel very confident that I am correct this time as well. As I pointed out in last week's column, home prices have already come down in several neighborhoods around the Puget Sound region based on actual appraised values of recent home sales. So it's no longer a question of whether home prices will drop, it's only a question of how much they will drop. In my past columns I have predicted that home values will drop by about 10 percent to 20 percent. I am using a range because I don't know exactly how much prices will drop, and also because there will be variations from neighborhood to neighborhood. Some neighborhoods will depreciate more than my range while others may depreciate less. But it's a safe bet to say that virtually all neighborhoods throughout this region will experience some level of price depreciation over the next year or so. When I suggested that people should refinance now before their home values drop any further, I meant that they should do so only if they have a valid reason to refinance and may have been dragging their feet about getting it started. I have never advocated pulling equity out of homes for frivolous purposes; in fact, in some of my past columns I specifically warned people not to use their home equity line of credit like a credit card and put themselves in danger of losing their home to foreclosure. With falling home values, there is a very real danger that many people may find themselves owing more than their home is worth in the next year or two. So you need to be even more careful than usual in managing your finances so that you don't get too far into debt. If you think there is any chance that your income may decline to the point that you could not cover your mortgage payments, do not increase your debt load. On the other hand, if you are planning to do a home remodeling project, or have some other prudent use for the funds -- and you are confident that your future income is stable -- it makes sense to refinance while you have maximum equity in your home. That's because your mortgage rate is based on your loan-to-value (LTV) ratio. The more equity you have in your home, the lower the LTV and therefore the lower the interest rate that you will have to pay on your loan. Conversely, as home values drop, your LTV will go up and so will the interest rate for the same loan amount. And in some cases, your LTV may become so high that you can't get the loan amount that you wanted at all. Just be careful. Do not borrow against your equity unless you have a very good reason, and make sure you will have sufficient income to replay the loan in the future. Mail your real estate questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206 or e-mail him at economy@heraldnet.com.

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