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Refinance misstep forfeits low HELOC rate

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POSTED November 1, 2012 6:12 p.m.

DEAR BENNY: A mortgage broker advised us several years ago to split our mortgage into a $400,000 mortgage and a $100,000 line of credit (we had $300,000 total available on the HELOC). A few months ago, we refinanced our $400,000 mortgage with our current lender. (Our house is assessed at $900,000.) We asked our lender if we could refinance our mortgage up to $500,000, pay down the $100,000 drawn on the HELOC, but still keep the HELOC with the HELOC lender open, and our lender said “yes.”

We have now learned from our HELOC lender that our HELOC has been closed. Apparently, our lender was supposed to do paperwork with our HELOC lender to keep the HELOC open, but that was never done. Our former HELOC lender said it can’t reopen the HELOC because the “lien has been released,” and that we just have to reapply for a new HELOC.

Our HELOC interest rate was in the 2 percent range, and now the quotes to get another HELOC with the same lender are closer to 4 percent. We were counting on the HELOC for a home improvement project, and now we have to apply for a new one. Our home improvement plans are in jeopardy now because these higher HELOC interest rates are going to make it cost so much more than we had budgeted.

What recourse do we have against our mortgage lender, who gypped us out of our line of credit with the HELOC lender? --Star

 

DEAR STAR: Are you sure that your old HELOC was a fixed rate? Most home equity lines of credit (HELOCs) carry adjustable rates. Thus, your old one may have gone up over time.

More importantly, interest rates are at an all-time low, so you should shop around for the best rate you can find. It is my understanding the most banks are anxious to make such loans and will not charge for setting it up, or at least the charge will be nominal.

If you can get a new HELOC similar to the old one, I wouldn’t spend time fighting. However, you can always file a complaint with the Office of the Comptroller if your lender was a national bank.

I strongly urge all homeowners to obtain a HELOC if they have any equity in their home. You don’t pay interest until you borrow on that line, and it’s nice to have a checkbook sitting in your desk drawer for that rainy day.

 

DEAR BENNY: You say that renting out a basement calling it a “mother-in-law” suite is illegal. Is that true in all states?

I have a finished basement with a separate kitchen, den, bath and bedroom. Other parts of the basement are shared: laundry room, recreation room, exercise area, second bathroom and my office. Please note I also have a laundry area upstairs.

A very good friend of mine lost his house due to reduced income after a local college dismissed 58 faculty/staff members, and he and his teenage son needed a place to live. I have let them stay with me for the last several months rent-free while the friend seeks a full-time teaching position and works at minimum wage.

I have considered putting up a mailbox and allowing them to get their mail there. Will that hurt me? I am sure that once a mailbox goes up, the county will consider it more developed and taxes may go up. Are there any other implications I should be concerned about?

I have seen the movie “Pacific Heights” and often tell people about that movie when discussing horrible renters. I’m not concerned about a roommate going bad. If I don’t charge them rent, can he use the other address without it causing either one of us problems? There will be no rent paid or received -- just what he pays towards electricity and gas. --Vernee

 

DEAR VERNEE: I can’t speak for the laws in your state; they do vary. Typically, in order to be a legal rental, most states require that the homeowner obtain a certificate of occupancy. The local government will inspect the property to make sure that it is habitable and in compliance with all building and housing codes. Some states also require that the landlord obtain a business license. That’s primarily a revenue-raising device.

I think you are fine with your current situation. It’s a temporary situation where you are helping out a friend in need. However, should you decide to formally rent out your basement apartment, I would discuss your situation with an attorney who practices real estate law. You want to know what the applicable landlord-tenant laws are in your state, and you also want to have a good, comprehensive, landlord-friendly lease.

But I do recommend the “Pacific Heights” movie to all landlords and especially potential landlords.

 

DEAR BENNY: What exactly is PMI? Is it there only to safeguard the lender? Does the borrower who pays the premium get any coverage from PMI?

My daughter bought a condo last year. Since her loan was more than 80 percent of the purchase price, she is required to pay PMI charges along with her mortgage and escrow payments for taxes and home insurance. She also took out a term life insurance policy for the amount of the mortgage. Does she need all three insurances, or is she duplicating coverage? --Nancy

 

DEAR NANCY: I received two questions on PMI, so see my response below the next question. However, I do want to comment about your term life insurance policy for the amount of the mortgage.

Check the policy. Are you paying the same monthly/yearly premium each and every year? If so, in my opinion, you are being ripped off. Your mortgage balance goes down yearly (albeit slowly). Why should your insurance premium stay the same? Shouldn’t it also go down to match the declining balance of your loan?

I am of the strong opinion that mortgage life insurance is a waste of money. Should you die, your house will either be sold or transferred by your estate to a relative or friend. If you really want life insurance, get a real life insurance policy.

Now see my response below about PMI.

 

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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