Q. I am trying to borrow $50,000 on my home to pay the IRS. The balance on my townhouse is approximately $26,000 and the value is $100,000. I am self-employed and have $50,000 stated annual income. My credit score is 650 but I completed Chapter 13 bankruptcy in March 2005. A nationwide lender has offered to refinance my home at almost a 12% interest rate. Should I take that?
A. We cringed when we saw that 12% interest rate, but you’re got three big things working against you:
- You're less than two years out of bankruptcy.
- You're self-employed.
- You owe money to the United States government.
While we hope you sought competing offers from other lenders, we wouldn't be shocked if 12% from a subprime lender is the best you can get. Just try to make sure any loan you accept doesn't impose pre-payment penalties. As early as next summer, once the IRS is paid off and you've been out of bankruptcy more than two years, you could look into refinancing and probably qualify for a considerably lower rate.
Q. We have been pre-qualified for a $300,000 loan but the house we are looking into buying is only about $170,000. Would we be able to use the remaining $130,000 for other bills?
A. We You were right to get pre-qualified. It is always wise to know how big a mortgage you can get before you go house hunting. It saves a lot of time, trouble and disappointment, and because you are pre-qualified, a prospective seller will be more receptive to your offer since financing is guaranteed.
But the amount that you are qualified to borrow is based on your income, credit history and other financial data. But it is not a guaranteed loan. If you find a home you want to buy that is worth $170,000, that¹s all you will be able to borrow, less whatever down payment you have. Your home is collateral for the loan, which means the lender can foreclose, seize the house and sell it to get his money back if you don’t make the payments.
But if you borrowed $300,000 and the lender sold your home for $170,000 or even $190,000, where would the extra $110,000 come from? That’s why a lender won’t loan you more than the house is worth.
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