Looking at all the news about shadow inventory, foreclosures and short-sales, I wondered what can be done to stabilize the situation. Mortgage payments for some due to high with ARMS, sized-down employment, death of a spouse/partner, and military moves are causing a good number of Foreclosures and Short-sales.
Could it be that the answer lies in the "Payment"?
There are only five ways to lower the payment:
•1. Lower the loan amount (forgive the difference)
•2. Lower the interest rate
•3. Increase the term by adding years
•4. Interest only payments for a while
•5. A combination of the above
If we have a mortgage (not including taxes or insurance) of $250,000 the payment would be:
|
Interest |
Years |
Monthly Payment |
|
5% |
30 |
$1,342 |
|
4% |
30 |
$1,194 |
|
3.5% |
30 |
$1,123 |
|
4% |
40 |
$1,045 |
|
3.5% |
40 |
$968 |
|
4% |
50 |
$964 |
|
3.5% |
50 |
$883 |
In California according to Bankrate.com article in May of 2006, with 25% of the loans being 40 year loans and 50 year loans were introduced.
50 year loans to me do not seem to be the best answer. However, lowering the interest rate and adding 10 years to a 30 year loan may be a significant reduction in the monthly payment (in a $250,000 loan the monthly payment would be reduced by a little over $400)! This may prevent homes from going through a foreclosure or short-sale process, have vacant homes, a devaluation of the surrounding homes, stalling the economy, etc....
Of course, certain caveats would have to be built into the loan program:
Cannot be used for a home purchase
Must demonstrate hardship (Death of a spouse/partner, re-employment lower wage, military move etc...)
Must be able to make new payments (Cannot be unemployed)
BANKS -As far as banks are concerned they will not lose the difference between the loan and the amount sold for if there is no sale.
CURRENT HOMEOWNERS- Prevent the lowering of home values in thousands of neighborhoods!
CRIME and DAMAGES - Homes will not be vacant and banks wouldn't have to pay for insurance on those homes.
In summary, this could keep people in their homes, banks will still make money on the loans, and the housing section might be a bit more stable.
Is it unfair to those that struggle to make their payments? Maybe... maybe not? I would have thought banks would have done this first before the short-sale or foreclosure route!
What do you think?
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