The Double-Edged Sword of Mortgage Relief
The financial news on television and in the newspapers is full of hopeful rhetoric on the help that is coming from the Federal government to assist homeowners who are struggling to save themselves from foreclosure. The purpose of the intervention, called the Homeowner Affordability and Stabilization Plan, is to keep people in their homes and stabilize the mortgage and real estate crisis that is affecting all investment markets.
This is good news for some homeowners but contains some risk for others. One way the programs tries to make home ownership affordable is to allow refinancing for homeowners who are current on their mortgages but do not have enough equity in their homes for a conventional refinance. This plan only applies to those who have their mortgages through Fannie Mae and Freddie Mac, so only a small fraction of at-risk homeowners will be able to take advantage of this plan.
The second part of the plan is for mortgage servicers to allow modification of the terms of the mortgage to ensure that homeowners can stay current on their payments. This is done mainly through interest rate reductions that are partially financed by the government. Each bank has some discretion as to how to manage these loan modification plans, but most require proof that the current mortgage terms are unaffordable to the homeowner.
And therein lies the rub. Qualifying for assistance requires homeowners to admit to the mortgage lender that they can’t afford their mortgage. While that may help homeowners in the short term, there is no guarantee that this disclosure won’t come back and bite them a year or two down the road when the program no longer exists. Borrowers who do not continue to qualify for their existing mortgage could possibly face increases in interest rates in the future or even a calling of the loan.
How can you protect yourself from the foreclosure crisis? The first line of defense is to know your budget inside and out. Make sure that you are putting your mortgage first before discretionary expenditures. Getting behind on your payments should be a very last resort. You have more flexible options before you default. Be on top of your payments. If you recognize that you are struggling to stay current, discuss refinancing options with your bank before you default. If you still have equity in your home at current real estate values, you may be able to negotiate a lower mortgage rate which will help your cash flow.
Third, use the new federal program if you need it. If the decision falls between taking advantage of the program and losing your home to foreclosure, the former is the better answer. In the long run, however, you will be financially stronger by heading off mortgage default before it occurs.
Popularity: 44% [?]
If you enjoyed this post, make sure you subscribe to my RSS feed!
Tags: mortgage, real estate investing
This entry was posted on Friday, June 5, 2009 at 8:12 am and is filed under Financial Education, Investing Strategies, Investing in Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
Leave a Reply
Get Updates via Email
Let's Connect
-
Advertisement
-
Recent Posts
-
Recent Comments