This blog was originally intended as a "financial forum" and has evolved into everything from a personal diary to a document of family history. Today is "financial".
The stock market dropped 400 points today. The alleged reason was that there is "uncertainty" in the money markets with reference to "sub-prime" loans. What the hell does that mean?
For many years, if you wanted a loan to buy a home you needed 20% down. To get favorable rates, your still need 20% down. Once you reach that level of equity good things happen. You avoid mandatory insurance paid and you get preferred interest rates.
In recent years, you could buy a home with 0% down and marginal credit history. You do pay for it with higher interest rates and imposed financial conditions. The penalties for default of a monthly payment are assessment of "late" fees, potential eviction and surrender of your first born child.
And then of course, the financial markets got creative. Adjustable rate mortgages were offered to get you a low rate initially after buying a home and then the rate would adjust with market conditions following "prime rate" or the clever "LIBOR indicator". This means you can afford the house initially but if your friendly lender increases your monthly payment because interest rates went up, you could find yourself unable to make payments.
Don't forget the home equity loan. This says that as the appraisal of your house slides upward over a period of time, you can borrow money on the house equity including increases. The home equity loan is at a higher rate than your mortgage interest rate and people find themselves with 0% equity in their house after taking a home equity loan.
The stock market is in turmoil because tighter money seems to be happening. The loan companies are making it tougher to qualify for loans. The demand for 20% down is increasing. "Home equity" loans are becoming tougher. Appraisals of home value are tightening up. Most important interest rates are rising.
There have been more foreclosures recently evicting owners. A large mortgage company holding low quality loans recently went bankrupt. People expecting to refinance their home after a grace period of 5 years at a low rate are finding unbelieveable "high" new loan rates.
It will take time for the mortgage market to settle down. Maybe 2-5 years. The result will be continued uncertainty. Trust me! Big money banks and loan companies will survive. The person with a difficult loan situation will not.
The advice Grasshoppers is keep the mortgage you have. Don't take out home equity loans. Plan to put a significant amount into your home (20% downpayment) in order to get favorable interest rates. Then go to a movie (preferably in the afternoon at discount rates) and enjoy the day. This too shall pass.
Love,
Dad