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Mortgage Refinance Rate, Finance, Amortization Schedule, Mortgages, Mortgage Refinance |
A Real Solution to the Mortgage Crisis - Reseting Rates to the Current Market Rate while Extending The Term Of A Loan Beyond 30 Years
Written by : FHASecure.info
One of the biggest threats to the future of the economy of the United States began only several years ago. Due to overconfidence in the future housing market, bad financial advice, rampant predatory lending, an arrogance as it related to their own future earning potential, or one of many other reasons, thousands of homeowners took out adjustable rate loans they could not ultimately afford once their initial teaser rate reset. Up to this point, no solution I have read proposed by so-called experts will work on all levels.
Simply extending the initial rate for several years :
This idea is laughable. It merely pushes the problem into to the future, but does nothing to address the actual situation. Rates will ultimately reset, causing the same effect as simply ignoring the problem.
Government Subsidies to Help Homeowners Pay Home Loans
This form of welfare simply takes tax money from others to act as a crutch for the ailing housing market, ultimately redistributing the loss of wealth to people that locked into fixed rate mortgages and younger Americans entering the job market after the problems began. These parties should not be punished for the indiscretions or mistakes of others, as they are in no way associated with creating the problem.
Forcing banks to allow customers to lock into their initial, pre-reset interest rate
On the surface, this seems to "fix the problem." The true problem, however, lies in the fact that many homebuyers were simply outliving their means. Many buyers purchased homes they simply could not afford. Some tried flipping properties in skyrocketing areas. Others used their savings to buy luxury items such as new cars or large screen televisions. Ultimately, this idea misses the point that a majority of persons buying homes with variable rate mortgages did so simply as a way to support a lifestyle they could not continue to afford. By rewarding this financial irresponsibility and bailing out these homebuyers, the government is simply encouraging this sort of activity in the future. And what of the people that were financially responsible enough to take out fixed loans during this time or spend thousands of their own dollars to switch to a fixed rate loan before their own variable rate loan reset? Are the any consolations for these people? A person that was willing to take out a $200,000 loan for 30 years at a fixed 6% will be stuck with a payment of $1,178.75 per month, while a person lucky enough to take out a variable rate loan that was later fixed at 5.5% for the same amount of time and money would only have to pay $1,118.83 per month. Over the course of the loan, that is over a $21,500. This reward (ultimately, a subsidy) is given while no accountability is expected for making a poor financial decision. Moroever, a significant burden is transferred to the lending industry, which would have to shoulder the blow through layoffs and future rate increases to more capable buyers.
The Solution
This solution is actually very simple. Allow people with resetting interest rates the opportunity to restructure their variable rate loan to a fixed rate loan at current mortgages rates while keeping their monthly out of pocket cost the same. This is actually possible for many loans. How? Extend the period of these loans beyond the typical 30 years they were written for.
An amortization schedule is actually a thing of mathematical beauty and lends itself directly to this sort of reconfiguration. Let's look at a $250,000 30 year loan, taken out at 5.5%, and fixed for only 3 years. The initial monthly cost for this loan would be $1398.54. Let's assume, however, the reset rate increases to 6.5% after this initial 3-year period. The loan would jump to $1,538.94. Even if we assume that the rate never resets again, this is a difference of $140 a month for the next 27 years.
Instead of creating this sort of "sticker shock" or subsidizing the loan, one alternative would be to raise the rate to current standards while extending the term of the loan. In the above example, assume that, instead of allowing the homeowner 27 additional years to pay off the newly higher loan, the bank instead allowed 45. Doing so would drop the monthly cost of the loan from $1,538.94 to $1,397.59. This amount is almost identical to the original.
This solution allows people with resetting loans the opportunity to keep their home at their current monthly cost for the entire remaining term of the loan. No subsidy is given to these people; the term of their loan is simply increased, and the cost is spread out over the additional years. From an accountability standpoint, these people are still faced with either a longer loan, or the option to later "buy down" into a home with a typical 30 year rate. This also helps the lending industry avoid the cost of foreclosing homes, or eating the cost of locking in these customers to lower rates.
In conclusion, the mortgage crisis is actually very solvable on all levels with a little bit of creative thinking.
This article was originally posted at http://fhasecure.info. This article can be reprinted in its entirety as long as this footer is included.
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Mortgage Refinance Rate, Finance, Amortization Schedule, Mortgages, Mortgage Refinance
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