Understanding Home Loans
When learning about home loan default, the first issue homeowners need to get to grips with is understanding the terms being offered to them by a lender. Banks and financial institutions use the term “home loan” to cover a broad spectrum of products, including term loans, balloon loans, equity lines and different mortgage products. Borrowers need to find out what the rate is and if the rate is fixed or variable.
Consumers often confuse variable rates for fixed rates when they discover that a rate is fixed by a certain margin to an index like the Prime rate. While the loan may be fixed at one percent above prime, the rate can still change because the prime rate changes, so the loan rate moves in conjunction with it. Variable rate loans may seem appealing now because the prime rate is at 3.25 percent, but most equity lines have caps at close to 20 percent.
If the prime rate were to rise rapidly, the effect on an interest-only payment would be enormous. Someone with an interest rate fixed at one percent above the prime rate, paying interest only payments on $100,000, would see their payment more than double if the prime rate returned to 8.25 percent, where it was in June, 2006.
It is not advisable to enter into an agreement for a variable rate loan or line, unless sufficient funds will be available to pay it off within the following 12 to 18 months. Consumers with sufficiently strong credit to qualify for equity loans could probably qualify for credit cards also, and though it might take a few cards to match the line amount offered through a loan, their home would not be at risk from rate fluctuations.
People already in variable rate loans should be cautious about offers to “lock the rate.” Typically, such rate locks are at rates higher than the current variable rate, include principal as well as interest, which means higher payments and often only fix a portion of the line for a certain period of time. Generally, fixed rates are easier to understand but do not move into one without first checking how it might cause your payment to rise.
Already in Trouble
Many homeowners who did or did not understand the full terms of their home loans are already in trouble financially. While it is widely understood that mortgage holders can foreclose on delinquent first liens, some people do not realize that second lien holders can foreclose on a property.
The first step consumers should take to avoid defaulting on a home loan is to prioritize which bills need to be paid first. After basic essentials and taxes, people wanting to keep their family home should pay the mortgage and any home loans before other bills such as credit cards, or unsecured debt. The credit card companies need to be paid but protecting your home comes first.
If money is too tight to pay the home loans, then it is worth considering whether you would be better off not contributing to the 401k for a few months. Doing so might free up enough cash to get you through a rough patch.
If you cannot come up with the money needed to avoid a home loan default, then contact the lender. Many banks are difficult to negotiate with, but if you persist then you may be able to agree to a workout loan, particularly when dealing with a second lien.
With house prices having depreciated, many houses are not sufficiently valuable to cover money owed on the first mortgage, much less the second. In many instances if a second lien holder were to foreclose, they would run the risk of ending up with nothing. It is difficult to navigate the red tape and bureaucracy at banks, but somewhere behind the scenes, there are people who understand that financially it would be in their own best interest to work with distressed home owners.
Federal Reserve Board: Putting Your Home On The Line https://www.federalreserve.gov/pubs/riskyhomeloans/
Wall Street Journal: Prime Rate https://www.wsjprimerate.us/wall_street_journal_prime_rate_history.htm