Over financing your property is much like a double edged sword. It can help you in some ways for the short-term but can also give you grief in the long term.
Let’s say you have about $70,000 to pay off on a $ 200,000 property. Refinancing (or over financing) means that you can get a new loan for about $ 100, 000 currently based on the value of the house, at a lower interest rate, which you can use to close the payment that you still owe at the interest rate that you bought while keeping some cash behind for various purposes.
Some folks do this to lower monthly payments (as the refinancing loan offers a lower interest rate), or gain a cash out which they have to spend on their children’s education or in some cases, buy new property or invest in a new business.
This is a safe proposition except for the time when you can get almost 90% to 100% of the value of the property which can spell sure disaster even though you might think that a lack of expenditure on your part is the best deal.
Why this turns out to be a risk is because:
If you’re having problems with your tenants, you won’t be able to sell this property to a homeowner as your occupants have destroyed the property nor will you be able to sell it to an investor as you have taken too much as a loan (100%) compared to the property value.
Secondly, if you have taken some cash out, and now find that the rent you collect doesn’t meet the total amount of the loan you have taken you cannot sell not until you pay a certain amount of the new loan back. It’s an unrealistic expectation to think that cash flow will be consistent.
Thirdly, if you look at the interest charged between an 80% vs. 100% loan, you’ll notice that the latter will cost you much more in interest in the long run.
However, refinancing your property is not a bad idea, but you just have to ensure that your total debt is less than 80% of its value.