It’s been happening a lot recently: people walking away from their mortgages. Yes, this has a lot to do with people who get into mortgages they can’t afford either because they got into them without figuring out how much a variable rate might cost them or a loss of a job, but there are some people who see that their house is underwater (owing more on the house than it’s worth), decide that they’re never going to catch up, and walk.
Even if they can afford the mortgage.
There’s a lot of ethical issues with not paying back debt. Money tends to be an issue between even the closest of friends. I’ve lent money to friends who have never paid it back and I’ve done work for friends that I was promised to be paid for and never seen a dime. These aren’t amounts in the thousands, although they were in the hundreds–just enough for me to decide not to lend or work for these people again.
Now, if my friends had not been able to pay me back because they lost their job or had some kind of disaster happen, I might be more forgiving. But it’s really difficult to feel like someone who doesn’t pay their debts–even if they can, by all indications, afford it–is doing the ethical thing.
To go back to our original example, yes, there’s a need for bankruptcy, but it seems to me that if someone can afford their mortgage–a debt of hundreds of thousands if not millions of dollars–but they walk away from it instead, there’s a really large ethical–and maybe legal–issue there. It makes it more difficult for other people who need loans and can pay them to actually get them, and it was clearly one of the issues in the financial crisis of 2008.
Don’t borrow money you can’t–and/or won’t–pay back.
It’s official. I have to take over my mother’s finances.
My mom is 76 years old this year and her hearing is pretty poor, but recently her memory has been getting worse. She’s fine to be home by herself, but recently she’s been bouncing checks.
This past year she’s bounced a few checks, which in and of itself is a little concerning, but her checkbook reconciliation is the concern–she’s added where she’s needed to subtract (fortunately as a bank retiree I think the bank has decided not to charge her any fees). But today she told me that she saw someone at the bank yesterday and they told her in four or five more years that the mortgage was up and the family would lose the house–which makes no sense to me on many levels, but especially because the mortgage isn’t even at the bank!
So I spoke with my sister and today decided I’d take over the finances from her.
It doesn’t thrill me, but it has to be done.
One of my coworkers, a divorcee with adult children who, like me, works multiple jobs, was asking about taking out a home equity loan to pay off some credit card debt. My response: it’s more important to reduce spending to live within your means than it is to pay this off in this manner, because all that’s happening is debt is being shifted from one pile to the other.
“But I can’t make ends meet.”
And that’s what it came down to. I could sit down with my coworker and go over every single bit of her budget to try to find areas to cut–piano lessons, gym memberships, cell phones for her adult kids–and none of it would matter if she didn’t have the discipline to actually do it.
A budget, after all, is just a plan; if she can’t follow through, it doesn’t matter how the math looks. What counts is the discipline to keep spending in check, and if she doesn’t have that, no amount of loans or plans will help.
The Federal Reserve met today and it appears that interest rates will stay low for some time to come.
While this is not the best news for savers who are already struggling to find “high yield” or money market accounts paying even two percent–and regular brick and mortar banks tend to give even worse rates–if you’re looking to borrow money or refinance a mortgage, this could really help.
In combination with the extension of the Federal Housing Tax Credit, this might make more first time homeowners out there; it could also really be a big deal for folks who are trying to refinance a mortgage.
Take advantage of those great rates if you can. They certainly won’t last forever. We already did by refinancing the mortgage in 2009 to 4.25%, a rate I’m ecstatic about. It wasn’t a fun process, but it was worth it.
One of the best features of the economic stimulus packages that have been going around since the economy got flushed down the toilet has been the homebuyer tax credit of up to $8,000 for first time homebuyers, which is set to expire at the end of the month.
Fortunately, there is bipartisan support for extending this credit.
This is a huge break for those looking to buy a home, but it comes with the usual gotchas (besides the credit actually getting extended, which the lawmakers are working on right now): the buyer has to have a down payment saved up and decent credit to get a loan–which really, is the way it was always supposed to be–and find a lender willing to lend you the money.
That said, if you meet those requirements, you may have a few more months to make this into a fantastic time to buy a home.
One of the nice side benefits of the low interest rate environment is that mortgage rates are continuing to stay low. I told the story a few months back about refinancing the mortgage here to a 4.25% fixed rate over 30 years; apparently, according to this CNNMoney.com story, mortgage rates have dropped for six weeks in a row, and some are seeing rates below 5%.
If you have either enough money for a decent (at least 20%) down payment on a purchase or are refinancing with sufficient equity, have a pretty high credit score, and a secure job with a decent income, it may still be the time to refinance.
Personally, we cut hundreds of dollars a month off of our mortgage payment every month and dropped about a point and a half (more, actually) off of our rate, so I’ve been really happy with our refinance. If you can drop a point on your rate and you have more than seven or so years left on your mortgage, it may be well worth your while to refinance yours too! Think about it.
One of my coworkers told me this during a lunch break. Knowing her, I was not surprised, although I’m not sure if there’s much of a way to help her:
“My husband is convinced housing prices will drop to the point we can afford to buy a house. But we’re not saving anything.”
This looks like a missed opportunity waiting to happen. The days of the freewheeling mortgage brokers are gone; it’s so much harder to get a loan now than it was when the housing market was booming it’s as if everyone has done a complete 180. Granted, it really needed to be harder than it was, because the way we got into this mess is by lending people who had no chance of paying it back–and who may have been a lot less than honest about their financial situation when applying for the loan–a lot of money. Turns out they couldn’t pay it back, so now the lenders are gunshy and wanting everything verified to the nth degree.
However, that said, it’s not impossible to get a loan–all that has to happen is that you need a strong credit score and a reasonable down payment.
My friend is in grave danger of missing the boat here. As evidenced by my mortgage refinance not long ago, rates are very low historically (even if it’s become impossible to get the 4.25% we did), and home prices are still coming down. But without saving for a down payment, there’s no way my friend is going to be able to get a new house when she and her husband think prices have come down enough.
Despite all of the changes over the years, the reality is still this: the basics for buying a house are good credit and a down payment. Without these–especially now–there’s no way to do what she and her husband want to, and without saving, they definitely won’t be able to get the house they’re hoping for anytime soon.
Welcome to our on-time-for-once edition of the Link Payday. This day after United States Independence Day, we take a look at some of the best posts on personal finance blogs of the last few weeks:
This is a conversation that comes up fairly often: how much or what to give for a wedding gift? Lynnae over at Being Frugal asks the readers the question in You Tell Me: Favorite Frugal Wedding Gift. This is a tough one to tackle and opinions seem to vary wildly, so thanks for taking it on!
Blogging Away Debt tackles a close to home subject (everyone in this state is affected, either directly or through a friend or family, by the crunch here which is possibly leading to furloughs or layoffs) when she talks about Understanding Government Spending… Since she’s a government employee herself, she has a view that’s right in the midst of this controversy.
Ron at The Wisdom Journal might be talking to me when he says Having Too Many Goals is Like Having None. Yes, I have a lot of goals, but I’m hoping they’re not too many; I do, however, run out of energy and not get everything done the way I want them too. I’ll have to consider that a bit.
Spilling Buckets tells us 10 Things I Wish I Knew as a First Time Homebuyer. Considering that they just purchased their home, I think they’re far ahead of the game; after all, I wish I knew a lot of things as a first time fill-in-the-blank only months or years later!
And finally, David over at My Two Dollars tells us How to Fix a Mistake On Your Credit Report. I‘m hoping I can finally get one of the bureaus (after years of trying) to fix a mistake on mine (they think I lived somewhere in California–I’ve never lived off this island!).
And that’s your Link Payday for July 5, 2009!
I’m currently in the process of a third listening of the CD audiobook version of All Your Worth. While I initially was quite skeptical, I’ve become a bit intrigued by their idea of budgeting and the concept of counting the dollars rather than the pennies.
The short version (very short) of their idea of a budget is 50% of your take home pay going to “must haves” (like rent), 30% to “wants” (just for fun stuff, like eating out or parties), and 20% to savings. They seem to be against spending logs (of which I’m a big proponent) because the people who do them are no fun (hey!). But the concept that I thought the most of was how before the advent of the credit card for most consumers, they had a lot of difficulty actually getting into financial trouble. Why? Because no one would lend them “too much money”; money that they really are a poor risk to pay back.
Say, like that subprime mortgage mess.
I’ll give a more complete discussion of this later; what I can say now is that while I started off a skeptic, I’m warming up as I repeatedly listen to it.
Many people are confused about the term “tax deductible”. We often here that in reference to donations to charitable organizations or for the interest on the mortgage payments for a primary residence. Here’s how all of this comes into play:
For federal (and, at least in Hawai’i, state) income tax, there is a “standard deduction”–an amount that the folks who collect and calculate taxes on income say you can deduct no matter what. However, if you have tax deductions that are in excess of the standard deduction, it would reduce your taxable income to use those instead. The interest on primary residence mortgages and charitable donations fall into that category.
Despite common belief, you don’t get a one to one benefit on your deductions. Instead, what you are getting is a benefit equivalent to your marginal tax rate on deductions, and in the case of interest on mortgages, it’s a benefit on paid interest. Let’s look at an example:
Say you’re in the 25% federal tax bracket, as I am. Let’s say you have a $1200 a month mortgage payment, and $1000 of that is interest. At the end of the year, you can deduct that $1000 from your adjusted gross income; given that you’re in the 25% bracket, 25% of that $1000, meaning $250, is the amount you are actually reducing your tax bill by. Let’s say you’re in the 5% state bracket; that would be another $50 off your state tax bill. So while you are getting a hefty $300 in tax benefit, it’s not the whole $1000. Keep this in mind when considering whether or not you can afford your mortgage!
It works similarly for tax deductible charitable contributions as well. While the tax benefits are great, just remember that you’re not getting a one to one benefit, rather a benefit based on your marginal tax brackets.
