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Protecting Yourself During the Mortgage Crisis
By Howard Wayland | May 5, 2008
Since April of 2007 the mortgage and subsequently the housing industry has been in turmoil. You might ask yourself, “How can I protect myself.” First, if you plan on living in your present home for three or more years, don’t worry. By then things will be straightened out and values, which may be lost should start to rebound. Secondly, you should access your current situation. Do you have a fixed rate or adjustable rate loan? Do you need to refinance a sub-prime loan? Are you going to move soon? These are a few questions you will need to consider.
If you have an adjustable rate mortgage, called an ARM loan, since the rates are low you should consider refinancing it now to a fixed rate mortgage. You should be able to get a low fixed rate loan and forgo any further potential increases on your ARM loan when the rates go up again.
If you have a sub-prime loan get out as soon as you can. FHA has a program that may help you called the FHA “Secure Mortgage”. This is designed primarily for borrowers who have a sub-prime loan. If you were current when your interest rate increased on your sub-prime ARM loan, you may qualify, even if you are not current on the loan today. This is not a foreclosure bailout mortgage, but designed to help you if you had severe payment shock and have not been able to refinance your sub-prime loan. Some lenders will not approve an FHA Secured Mortgage if you are behind, even if the rules allow them to do so, so try and keep up your payments current until you refinance the loan.
If you have to sell your home soon, then you should put it on the market early and give it more time to sell. This will keep you from having to sell at a steep discount when you are forced to sell it. If it sells quickly, rent a home or apartment until you have to move. This may save you thousands from selling it on the distressed market. Currently, distressed homes sold in volume quantities sell for 50% – 70% of their fair market value. You do not want to compete with that market by selling your home as a distressed property.
Since appreciation will not occur for a year or two, the best way to add value is to lower the loan balance on your loan. To do this look at the interest rate on your home mortgage, if it is above 7.5% and an FHA or VA loan you might want to consider an FHA or VA streamlined refinance. This should not cost you anything out of pocket and if you choose a slightly higher than market interest rate, you will also not have to make your loan amount any higher. This is also called a “no-cost” refinance.
If your savings are sufficient, you might consider a term of 20 year instead of 30 years. Another way to save you money is to borrow at a lower rate and shorter amortization at the same time. If you have a 150,000 loan borrowed 5 years ago at 8% and amortized for 30 years, (assuming you made no principal reduction payments), then you would owe approximately $142,455 today. If you refinanced your loan at 6.5% today for 20 years, many positive things will happen. First you will lower your payments by $38.55 per month and you will pay off your loan five years sooner. This will save you about $54,282 in lowering the principal alone plus save you an additional $9,250 by lowering your payments. Additionally, if you really want to save more money, apply the difference in your payment savings as a principal reduction to the new loan and you will own your home free and clear in about 18 years 8 months. You will then save a total of about $71,242. The best thing is that it won’t cost you a penny.
Why is this important during the mortgage crisis? The answer is simple. You will not see any real estate appreciation for next couple of years, so the best way to add value to your house is by lower what you owe on it. This savings will help you in the event you have a job change and must relocate or need to move for another reason. You will then have more value in your home because of the lower balance owed on your mortgage and this will give you a greater chance of selling it when others may owe more.
There is currently a non-profit group exclusively dedicated to assisting you with mortgage lenders and educating you on mortgage loans and the lending process. They provide more tips and ideas that can save you money on their website at www.mortgagechampions.org. This is a web site owned by Mortgage Consumer Advocates, a Texas non-profit corporation dedicated to consumer education and protection on mortgage loans and lending.
By Howard Wayland Jr.
Topics: Articles, Loans, MortgageChampions.org, Refinance, Tips
