With all of the debate going on about the how and why we should or should not raise the national debt ceiling, I began to think more local and more personal. I started to think of the "debt ceiling" of a potential home buyer. I would like to lay out a scenario for you and then get your opinion of which plan you think is the best.
Here's the deal: Mr. and Mrs. Smith own a huge house right now. They must own a huge house because their four grown children still live with them. BUT .....their children are now having children and the Smith's need a BIGGER home. AND they need the limits of all their credit cards increased. To qualify for the new home, they need one of two things - more income or less debt. Two of their children are working, John as a Realtor and Jane as a mortgage banker and they both contribute as much as they can to the household expenses. Both want to expand the size of their individual businesses and hire assistants; however because they contribute such a large portion to their parents for the entire family's living expenses, they cannot. Their two siblings, Jim and Jill, have been unable to find work and thus contribute nothing.
Here's the challenge: Mr. and Mrs. Smith have massive expenses on the home they currently own and they are "hanging by a thread", even with "interest only" payments on both their mortgage and their credit cards. To further the problem, they have actually been living on credit cards and now they have maxed out all of them. However, if the credit limits are not raised immediately, their credit scores are going to go to plummet. At that point, interest rates on all their loans will rise thus increasing their payments on the home, their credit cards, and they could possibly end up in bankruptcy and/or foreclosure. The Smith's are good people and have always paid their bills - as are their children. But obviously, from a financial perspective, some changes need to be made.
Here's two potential choices:.
Here are two plans I thought of- I'm sure you could contribute more:
#1 - Raise the "debt ceiling" for Mr. and Mrs. Smith so that everyone can live comfortably in a newer, bigger house; finance the new home with the higher interest only payment, raise the credit card limits so that Mr. and Mrs. Smith can draw off the credit cards to pay their bills. Then everyone cross their fingers and hope and pray for the best. I'm not too cranky about this choice - but it IS a choice; OR....
#2 - Deny the loan for the bigger house explaining that the Smith's will need to live on a tighter budget and maybe a little uncomfortable in their current home. This will NOT make the Smith family very happy at first. BUT lay out a one year financial plan which would include simultaneously doing two things:
(a) Refinance their current home into a mortgage paying both principal and interest payments so that they can begin to build equity and also raise the "debt ceiling" of the credit cards for temporary relief to save their credit scores and their low interest rates; and,
(b) Reduce John and Jane's contribution to Mom and Dad for the household expenses. John and Jane can then take this extra money to hire their two siblings to increase the size of both of their businesses.....John hires his brother, Jim, as his assistant in the real estate business and Jane hires her sister, Jill, as a processor in her mortgage practice.
Within one month, all four siblings are contributing to the household expenses. Within one year, both businesses have grown substantially and they considering expanding and hiring some cousins!
The family debt has been decreased and the household income has increased. All four of the siblings are doing great in the Real Estate and mortgage business. In fact, they have become so financially fit and independent, they are ready to leave their parents home to PURCHASE THEIR OWN HOMES! So......Mr. and Mrs. Smith do not need a BIGGER house - they need to downsize to a SMALLER home.
A little pain for one year and that was hard. Really hard. There was no immediate or instant relief or new home - and no new home sale. But in the end - instead of ONE new home sale, there are FIVE HOME SALES!
Raising the debt ceiling for this potential home buyer - which plan do you think is the best? Or maybe you have a plan that would work better? Let me hear it!
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Photo by Simon Howden
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