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  1. Susan:

    What do you mean by “safe”? You need to look at the terms of the financing (e.g., the fees charged and whether the rate is fixed or floating) to see if it’s a good deal. I don’t know current USDA deals — is this a Section 502 direct loan by USDA? Be aware that they could sell your loan to someone else, or at least they used to do that. That would mean you would have a different lender/servicer than USDA collecting your payments.

    I take it you own a home and are asking about refinancing to get money out of your house. No one can tell you whether refinancing is a good idea without knowing your personal circumstances and in particular the details of the loan you already have. Perhaps you could consult a reputable credit counseling company (which should not charge a fee and which is not a mortgage broker) to help with the financial analysis — “run the numbers.” Your local USDA office may have names of credit counseling companies, or maybe they will do that for you. Some of the people in USDA rural extension offices are good people.

    What I can tell you is that 100% loans to people who are already on the edge are risky loans to the lender, which means they are risky loans to the borrower because they are more likely to go into default and end up in foreclosure. And that taking equity out of your home makes it much less likely you will every own the home outright, or be able to sell it for more than the amount you owe (meaning that if you want to sell it, you would have to PAY money to the lender at closing to cover selling commissions, fees and the shortfall in equity to pay the loan back). Your credit will be damaged if you enter into a short sale where the lender takes a loss when you can’t pay off the loan with proceeds of sale of the house.

    The longer you pay on a loan, the more of your payment goes to principal (google “rule of 78s” to understand how that works). When you refinance, you start all over again and most of your payment goes to interest. If you have 100% financing, usually there is a mortgage insurance requirement, although I don’t know about USDA loans. That could increase the payment by $25 or $50, depending on the amount of the loan (it’s a percentage). So for a long time, from an equity perspective, a new loan will be like renting, but you have the risk of not being able to sell without further loss (unless housing values increase) and you have responsibility for upkeep. This is why I, personally, am not in favor of low-income people purchasing homes with 100% financing unless their incomes and jobs are VERY stable, the homes do not need a lot of expensive upkeep, they want to stay in the home for many years and they are well-educated about personal finance and willing to disciplined and responsible in their future spending.

    If your current interest rate is much higher than 5%, the fees for the new loan aren’t very high, the 5% rate is fixed and what you are going to do with the equity take-out is an absolute necessity, it MAY make sense to refinance. But ask yourself, if I need the $8,000 just for necessities, will I be able to maintain the loan after the $8,000 has been spent, or will I just go into default? If you have $8,000 equity in the house, does it make sense to sell the house and rent something cheaper? Remember that in refinancing, you are “buying” the lower interest rate at the expense of the fees for the loan and the mortgage insurance, if any — those are additional amounts that if you paid them on the current loan would go into equity. I don’t see the point of owning a home if you aren’t ever going to actually own a piece of the house — unless rental rates in your area are higher than your mortgage payment (after property taxes, insurance and costs of maintenance and repair).

  2. I have noticed the low interest rates on mortgages right now. I live in Oregon, and it’s about 5%. They are also offering incentives like $8,000 cash back, and 100% USDA financing in rural areas.

    I was wondering what you think of all this? I am a single mom with low income, and I qualify for some of these programs, but I am not sure if there is a catch to it? Do you think it is a good idea and safe?

    I would be so grateful to know your opinion.

    Thank you

    Susan

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