Foreclosures

Foreclosures

The American Dream is a term used to describe as gaining something in return from hard work, and for many generations the American dream was a reality for many citizens. A half a decade ago the housing market was at its all time high and at one point in time it was easier to qualify to buy a home than a car. Unfortunately the American dream as we know it has come to an end. With this mortgage crisis affecting over half of American households; and the economy nearly being in recession, many families’ worst nightmare of having their homes foreclosed has now become their sad reality. This reality was a bubble that was creating a huge demand for housing and now that it burst, our economy is being filled with massive numbers of consumers spending.

What is a foreclosure? “Foreclosure is a process that allows a lender to recover the amount owed on a defaulted loan by selling or taking ownership (repossession) of the property securing the loan” (Foreclosure Overview). The course of a foreclosure usually begins when the owner of the home fails to make a payment on their mortgage, then that is when the lending institution files a Notice of Default. Most of the foreclosure homes have an “Arm” Loan. The “Arm” Loan has four options within it, a person may choose: interest only, principle and interest for 15 years, principle and interest for 30 years, or the minimum payment. Unfortunately most people chose the minimum payment, and did not fully comprehend the concept of the loan. The “Arm” Loan is not necessarily a bad loan, but instead people made bad decisions.

Another loan which played a role in the current mortgage crisis is the Sub-Prime Loan. Sub-Prime Loans are loans that have a 2-year fixed interest rate, and when the 2-years are up it becomes a variable interest rate. Meaning that each month their payment varies, pending on the interest rate. Interest rates are determined by credit scores, which means the higher a persons score is the lower the interest rate is, and vise versa.

Here is a numerical analysis of a $400,000 loan at 7% interest during your first year:

Type Monthly Payment Approx. Principal Paid per month

Option ARM........$1286 (@1%).......................-$1047

Interest-Only........$2333 …................................$0

50-year .................$2406 ....................................$75

40-year .................$2485 ....................................$150

30-year .................$2661 ....................................$330

15-year .................$3595 ....................................$1270

Learning Points

1. Notice that the interest-only is the same as an "infinite-year" loan. So, if someone tells you that you are getting a 100-year loan, it is almost the same as interest only.

2. By underpaying your 30-year $400,000 mortgage by $200/month, you are adding on 10 more years of payments.

3. Conversely, by overpaying your 30-year mortgage by $200/month, you are happily losing 5 years of payments.

4. You are barely paying down any principal the first few years of a long-term mortgage.

5. A 15-year mortgage is about just as good as an Option ARM mortgage is bad.

Many families that are facing the harsh reality of having a home foreclosed are surprisingly not home owners, but renters. These renters