Trapped in a Refinancing Nightmare

Tom and Jennifer, whose last name is being withheld to protect their privacy, own a home in northwest Phoenix, in a nice, older neighborhood. When they purchased in 2002, it was just right for their family: plenty of space for Tom to access each room in his wheelchair, and great potential to remodel the home so he could function more independently. It was, truly, their dream home, that they made an offer on, after only five minutes of seeing the inside of the home, and spent months on remodeling it to suit Tom's needs. But, they will be moving out in September 2007, after only five and a half years in their dream home, and they will go to live in a cheaper market, a six-hour drive away from the only family they have.

Why are they making this move?

Tom and Jennifer became trapped in the same nightmare that many homeowners, and former homeowners found themselves in, in the Phoenix market between 2003 and 2005. Investors from Los Angeles began buying homes in Phoenix, speculating that prices would increase soon, speculating that they could make a fast buck by buying a home and reselling it at an increase in price, to a buyer who'd heard that investors were beginning to buy homes, a buyer eager to make a deal before prices increased any further. Tom and Jennifer were lucky; they had purchased their home from the previous owner, just months before the now-famous real estate craze, that saw their own home's value double.

But, they were unlucky in that craze as well, as refinancing became more and more easy. Their home became an easy way to cover over poor financial choices and overspending, and refinancing became a way to mortgage the future, literally, to luxuriate in the present. According to Jennifer, when they purchased the home, their mortgage payment was a mere 17% of their combined pensions. Five years later, their pensions have not changed, but refinancing three times raised their mortgage payment to an impossible 45% of that income. The first crisis to come along, the death of Jennifer's father, caused the family to spend too much on takeout, phone calls, and funeral wear in their time of grief. Then Jennifer's widowed mother moved in with them, and while she brought her own money, the family still spent more -- grandma's channels added to the TV package, grandma's phone line added to the bill, more stress for an already-harried wife-turned-caretaker, another person to take out to dinner, another round-trip doctor visit, at $3 a gallon in a gas-guzzler van equipped for handicapped riders, each week. The second crisis, the serious illness and eventual death of Jennifer's mother, only served to increase costs, as more money was spent on fuel, food, and other little luxuries, so the family could spend what little time was left at the hospice facility. Normally Jennifer staved off trouble by borrowing from her parents. That, combined with refinancing usually bought the family a few more months. But, after losing both parents in ten months, there was nobody left to borrow from, and refinancing yet again wasn't an option.

Anyone who's ever lost a loved one knows that going through a time of loss can hit not only your heart but your wallet. But for Tom and Jennifer, already stretched to the limit by the deceptive ease of refinancing to solve financial mishaps, it was the final straw. Jennifer's mother was buried August 15. The home was on the foreclosure notice list on August 26. In their zip code, foreclosures are at 17.7 per 10,000 homes, according to AZ Central. They will likely sell before the foreclosure occurs, and be one of the 89.5 per 10,000 homes in their area who manage to sell before it comes to foreclosure. In spite of paying their mortgage for over five years, they will leave their dream home with just barely enough cash to settle in another home in a cheaper market, simply because they refinanced too many times, giving more and more of their equity away.

How can this be avoided? How can you prevent your dream home from becoming your family's worst nightmare? The answer is simple, but not easy.

First, don't buy what you can't afford. If you can't afford the payments, or if you only think you can afford the payments if you live lean for a while, then don't buy the house. If just one thing goes wrong in your financial planning, if gas prices or food costs climb up, if your electricity rates get raised just a little, you could lose your home to foreclosure, especially if you, like Tom and Jennifer, start refinancing to stall the inevitable.

Second, don't buy if you'll have zero savings afterwards. If you don't have at least 2 months' income, and preferably 6, in savings, don't buy. If you lose your job, you'll lose your home, and with it your credit rating and your options for rebuilding your life. Refinancing might give you cash in your pocket to get by, but if you mortgage the future, you're counting on the future to pay it back, and if it doesn't, you'll end up in foreclosure.

Third, don't refinance to pay off other debts. It only seems like the quick way out of your troubles, but if you've given in to temptation and overspent on credit already, you will do it again. And with your home refinanced and the payments even higher, it'll be even easier to fall into that trap the second time around. Diligently pay off your credit cards, get a second job for a little while, and talk to a consumer credit counseling service if you can't make at least the minimum payments on everything. Don't close credit accounts without consulting a financial advisor. Reducing your available credit can reduce your credit score. But if you don't need a certain credit card, you can cut up the card, to avoid using it, without closing the account.

Fourth, live within your means. This is a difficult step, because it goes against Phoenix culture, but it is a requirement. If you cannot pay all your bills, buy all your needs, and save 5% of each paycheck, then you aren't living within your means. Evaluate how you shop, what you spend on, and how you can cut expenses on the things you need. Start a perpetual "wants" list, evaluating it each pay period, crossing off things you no longer want, finding cheaper ways to meet some wants, and finally selecting the ones that are important to purchase soon. If you can't afford your chosen wants in a single paycheck, put the money into savings and wait. Save your credit card for a genuine need.

What can you do if you're in that crisis already, though, and you've already received notice of foreclosure?

First, do whatever it takes to survive, right now. Your kids need a home, you need food, you need a car and gas to get to work. If it means selling your home at a loss, that's what you have to do. Talk to a financial advisor about the best thing to do, right now, to protect what's left of your credit rating, and meet your immediate needs.

Second, once you get your family into a stable, affordable situation, figure out what you can do to make your budget work. Find the cheapest groceries, familiarize yourself with stores' sale and clearance cycles, learn which gas station is most affordable, discover the best thrift shops for secondhand clothes and learn which days they have 50% off sales. When you see things you want, write it down, don't buy it! Keep a list of things you want, and save it for when you can afford it.

Third, pay off your debts. Seek credit counseling to get debts under control. Even if you can pay all of your minimum payments, talk to a professional about how to accelerate payments to get your head above water faster. Learn about savings, how to save, and what you can do to prevent this from ever happening to your family again.

Fourth, and most importantly, be transparent with your children. Make sure your children see how you are providing for their security in a difficult time. Let them be a part of deciding what is important in the budget, and what is not. They might surprise you. Things you think are important for them to have, they may prefer to give up. For all you know, you may have been inadvertently wasting money for years on things that they neither want nor appreciate! Your children can help you right now, by letting their childlike creativity work out new ways to solve problems, and by understanding why not to badger you for this or that want. But, you can help your children, by letting them learn from your mistakes, so that your children won't have to go through this when they grow up. And once you're in this situation, making something good come of it will help you to keep a positive outlook, and keep moving towards financial stability.