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They Can Take That Away From You!

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The homeowner considering refinancing his home came to my office with a notebook filled with numbers. He and his wife owned a home worth about $450,000, with a current mortgage obligation of approximately $180,000. In addition, they had an RV loan of $65,000 they wanted to pay off, and figured they needed $75,000 to augment their daughter's college fund.

Mr. Homeowner's friendly mortgage salesperson told him that borrowing the $330,000 (which included $10,000 to cover closing costs) was a "no-brainer." His new monthly payment would be "only" $285 more monthly than he was now paying, and would relieve him of both higher interest loans and tuition worries!

However, before signing up for something that apparently had no downside, Mr. H. wanted my opinion. Was this new mortgage truly promissory nirvana? I was happy to provide my perspective, sharing that sometimes the numbers make sense for a refinance, but it's rarely ever solely about numbers, and it's never a "no-brainer." I told Mr. H we needed to examine what he would gain, then see what might be taken away if he failed to pay.

The new loan was a 15-year mortgage, while the Hs had less than 12 years to go on their home loan and just about 10 years left to pay off the RV. They would be extending their indebtedness, and might not actually be saving anything in the long run (we would plot out the numbers, I promised, if nothing else I said persuaded him to rethink the refi).

I inquired how the Hs, in their late 40s, were doing with retirement savings. "Not too well," he admitted, along with an all-too relatable recounting of how the big and small expenses of family life pushed long-term planning into the impossible category.

When their daughter graduated, they'd be in their 50s and have 20 years or so of potential income to stock their retirement shelf. But their daughter would have 50 years, I ventured, so wouldn't it make more sense to have her take on college loans rather than obligate themselves to pay her tuition over the next 15 years?

Most importantly, what troubled me more than prolonging the final payoff or scrimping during the couple's golden years was the swap the proposed refinance required. The Hs would be exchanging $65,000 of their home's equity for a paid-off RV!

Had he considered what would happen if some catastrophe curtailed the H's income, leaving them unable to make the RV payments? Their motor home would be repossessed -- a shame, but would it be a life-changer like losing one's home? "Of course not," said Mr. H, grasping what I was suggesting: a foreclosure might result if the bigger monthly burden made the mortgage payment unmanageable.

"I didn't realize there were consequences to paying off personal items with my house," said the suddenly wiser homeowner. "We use the RV for a couple of weeks a year, and it's nice. But I sure don't want to live in it full-time."