Posts Tagged ‘mortgages and debt’

Home Loan Modifications: Should You Refinance Your House?

Monday, March 2nd, 2009

Home loan modifications are not for most with debt

Someone who has non-mortgage debt should in general avoid home loan modifications like refinancing. This is because several months of payments after home loan modifications are complete, even if at favorable terms, are required in order to clear the initial refinancing costs to make it financially worth the while. However, if one has strong income security in spite of outstanding non-mortgage debt and excellent personal discipline, then cashing out a sliver of their home equity to pay down high interest debt may be acceptable. This is qualified advice since a strong correlation between cashing out home equity and getting deeper into non-housing debt has been identified.

If you have an ARM (adjustable rate mortgage)

Refinancing into a fixed-rate mortgage might be a smart move, although you need to make that decision based on your own assessment of financial security, including income security. This is because you need additional tenure in your home, which can be on the order of several years, before home loan modifications become worth the initial cost. The upside to switching into a fixed-rate mortgage is monthly payment certainty compared to variable rate plans, and more certainty means less risk – a major benefit for someone with debt, even if the fixed rate option is at a slightly higher interest rate than the ARM. Also, consider doing a point-roll into the mortgage. In short, look at costs relative to savings to calculate the payback associated with home loan modifications.

If you have 20% or more equity in your home

Home loan modifications are opportunities to contact your lender and make sure that they have eliminated private mortgage insurance (PMI) from your housing debt contract once you reach a level of 20% equity. This should help lower your monthly payments. Any freed up funds should be applied directly to your debt elimination payments, while providing for certainty of your monthly mortgage payments at a fixed rate.

Paying one-time costs that are either large or unexpected

If you have a choice between paying on your credit card or using funds from home loan modifications like a refinancing scheme, the interest rate and other terms attached to the bank mortgage loan from a mortgage contract are likely to be much more favorable than those of a credit card, despite the convenience of just swiping the plastic. Though there are better strategies for obtaining a college education than paying expensive tuition bills that one cannot afford, if one is committed to covering a tuition bill, then consider using a refinancing scheme to obtain the funds at a cost lower than a credit card or other private loan. Likewise for large, emergency medical expenses: it is better to cover these with funding through lower interest mortgage debt than that obtained through a credit card.
  
To sum up, in general, one should not refinance when in debt because of the risks associated with getting deeper into the red. The most important thing to keep in mind is that while home loan modifications like refinancing look (and are) favorable from a mathematical standpoint, homes should not be viewed as piggy banks. Avoid putting the house at risk, and cashing out equity to pay down high interest debt is not the same as saving income. Most with debt should view cashing out home equity as a last resort option. The DebtGoal product helps one gain a strong handle by automating the debt elimination process in a way that is easy to understand. 
  

Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs.  DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.

 

 

 

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Major Expenses When in Debt: Housing

Wednesday, January 28th, 2009

Once one has made the decisive choice to get out of debt moving forward, a major expense that each must consider is housing.

Home Ownership

Home ownership is oftentimes trumpeted as a must when in reality, it is not. In fact, one can strategize their finances, including the creation of a solid retirement account, without ever owning a home. This requires careful planning, and retirement account contributions are key.

Benefits to Renting

For most who are in debt, renting beats buying and can even make more sense than continuing to own a home. Some of the reasons include:

  • Cost of maintenance. Typical rental agreements do not require that tenants bear maintenance costs of the property
  • Flexibility to move/relocate. Many of those that struggle with debt also have job insecurity. Even if someone in debt does not have job insecurity, home ownership creates a major financial disincentive to relocate to another area for work. In the current economic environment, having less disincentives to relocate for any opportunity to find work (if unemployed) or to take a better job (if employed) can be a major aid to one’s cash flow, not to mention career trajectory.
  • Simplified debt reduction plan. Especially in comparison to adjustable rate mortgages, paying rent means planning for a fixed amount to pay in rent from month to month. This reduces cost of living uncertainties and increase the chances of forming and executing a plan to quickly eliminate outstanding debt.
  • No property taxes to pay. Some areas of the country have high property taxes. As a tenant, you will not be responsible to pay these.
  • No homeowner’s insurance to pay. Although renters can purchase tenant’s insurance, this is less than the cost of homeowner’s insurance.
  • No local government special assessments to pay. In the current economy, special assessments on property can appear more frequently. Avoid these by renting instead of owning.
  • Corollary effects. Home owners typically accumulate more possessions than renters, which can add to to your disincentives to relocate in order to improve your cash flow.
Though some of the highest risks for homeowners exist when the value of homes are about to decline, and home values have already declined in many markets dramatically, the current and continuing recession increases the uncertainty of income, stemming in part from job risk. For many, this translates directly into cash flow problems that undermine the value of buying and owning a home, even when conditions seem optimal. For those in debt, the chance to reduce financial risk by renting is more important than starting to build equity in a home through a mortgage. It is critical to look at some of the key elements of one’s financial picture: cash flow, existing debt, and budget, and carefully evaluate the housing options accordingly.
  
Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs.  DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.

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