Debt Fast Track

Rebuilding Financial Security: Your Home – Part 1

 Once again, there is discouraging news on the home sales front.  February 2011 home sales numbers are among the weakest ever, taking a 16.9% plunge, with the lowest reading on record since we started tracking such things in 1963.  Foreclosure sales continue to drive prices down.  Confidence among builders have taken another huge hit.

 To make matters even more difficult, it seems that people who have not been responsible with their debts or their monthly payments are reaping the rewards of the government backed solutions to reducing mortgage interest rates and monthly payments.  Ironically, you now have more options for reduction of interest rates and monthly payments if you are behind on your payments.  If you are making your payments on time, move to the back of the line.

 We have just been through a period of historic lows as far as mortgage interest rates are concerned.  Interest rates are now going up again, and most experts agree that they will continue to climb for a while.  Yet, during the low interest rate period, relatively few credit-worthy people were able to take advantage, because their home values had decreased, or because they were self-employed.

 During the mid-1990′s there was a lot of pressure by congress on the mortgage industry to provide creative mortgage products.  This ill-fated and ill-conceived pressure resulted in irresponsible mortgage products and irresponsible borrowing.  It was inevitable that the market would at some point collapse.  Once the collapse started happening, government once again stepped in, rather than allowing the free market to take care of things.  The reality is, the free market would never have created the irresponsible products on their own to begin with.  The free market would also have repaired itself much quicker without the subsequent government interference.  Why?  Because a free market is ultimately responsible for its actions, and will therefore make wiser choices if left alone.

 But, I digress, and need to get off my soapbox.  The reality of today is that if you are paying your mortgage on time, you have fewer options.  You can refinance, of course, as long as the LTV, or loan to value of your current loan fits current guidelines of 95% or less (there are some limited programs for higher ltv’s that are heavily advertised, but these products are severely limited).  With the reduction in home values, fewer people than ever before fit this category.  What’s more, if you have a 2nd mortgage on your home, refinancing the 2nd mortgage with the 1st mortgage reclassifies the refinance as a “cash out” refinance – more ltv restrictions and higher interest rates.

 The second reality is that if you are a small business owner, the cards are stacked against you.  Why?  Because you are likely not showing a consistent income in the manner that the lenders can accept with today’s conforming and FHA mortgage guidelines.  While you are the lifeblood and the catalyst of our economic recovery, the lenders cannot like you right now.  Your income is not on a w-2, and you use tax write-offs, hence, you are viewed as a bigger risk even if you have made every payment on time.

 Now, if you are not making your payments on time, Washington DC has incentivized the banking industry to work with you on renegotiating your current mortgage.  Mortgage Loan Modifications, while vilified in the press, have been widely sought and used by those who could not or chose not to make their mortgage payments on time.  A large number of mortgages have been successfully modified, only to have roughly 50% of the customers default on their modified mortgage payments all over again.

 Make sense?  Only in Washington DC.  My guess is that self employed borrowers as well as on-time borrowers who are upside down on their homes would be more successful making their mortgage payments on time with reduced payments and interest rates.  This would leave middle income America with more disposable income – a good thing for economic recovery.

 In the mean time, a home continues to be one of the largest purchases and largest monthly expenses in a families budget.  Every debt elimination plan should have a carefully monitored approach to paying off mortgage debt.  There is simply no financial security that beats owning your home free and clear.  Regardless of whether the market and government-regulated guidelines allow you to reduce your monthly payment, your goal and your planning should ultimately lead you to a place where your own your home outright.  This should continue to be the dream, because it is one of the key elements of taking charge of your financial future.