By Deborah Nayrocker
Forget about keeping up with the Joneses. Four million homeowners are behind in their house payments and have little savings to turn to.
Many Americans are struggling with mortgage payments they hoped they could manage. Their ability to pay was based more on hope than the reality of changing economic environments.
While wages remain steady for many Americans, costs of living are on the rise. More families are struggling to keep up with their payments.
The House that Debt Built
What led to this housing crisis? Lower interest rates lured buyers. There was too much borrowing. Many home prices were inflated.
Instead of settling for more affordable housing, homeowners bought more housing than they could ever afford. Many families did not have enough saved to put down the traditional 20% for their first home. Having access to easy credit, they sought financing for new homes with no money down and short-term low interest rates.
Many people couldn’t wait to purchase their dream homes. Some were first-time homeowners. And they made their wishes come true by taking on risky debt. Many first-time homeowners didn’t calculate extra housing expenses like property taxes, insurance, and maintenance.
About 50% of subprime mortgages were made to people with bad credit and no proof of income. Buyers were willing to speculate on home-price appreciation. Families were willing to put their financial future on the line by making risky financial decisions. In some areas of the United States, home prices were extremely inflated.
Of the 55 million U.S. homeowners with mortgages, four million are behind in payments. Last year about 1.5 million homes were in foreclosure proceedings (The Wall Street Journal, May 8, 2008). Foreclosure filings are up 48% from last year (ABC News).
Foreclosure is Not a Closed Matter
Foreclosure may seem like a viable alternative. But taking a closer look, there are serious consequences.
It harms your credit rating for years. Credit history makes up 35% of a person’s FICO score. As your credit score gets lower, your interest rate climbs.
Credit reports document foreclosures for seven years. Your ability to take out unsecured loans is lost during this time. A mortgage co-signers’ credit is also affected adversely.
Mortgage lenders can sue for personal assets and garnish previous homeowners’ wages to recoup their losses. According to The Wall Street Journal, “in some states, lenders can sue for assets, including a new house” (June 11, 2008). The mortgage industry is fighting back with stricter guidelines for home ownership. Mortgage underwriters Fannie Mae and Indy-Mac Bancorp report new and tougher loan-qualification standards.
The Home that Smart Planning Built
There are families who are able to handle today’s rising costs better than others. They are the ones who’ve learned that it’s more desirable to have less and hold onto it than to have more and fear losing it. It’s better to have a smaller house that’s affordable than a bigger house with a massive mortgage to accompany it.
Angela Sarno and her husband both have jobs they enjoy. Angela has never had any credit card debt. The couple can afford a bigger place in Los Angeles than their one bedroom apartment, but choose to stay where they are. They own one car and Angela likes riding her bike to get around. They’ve made an intentional decision to keep their living expenses down.
The Millionaire Next Door, by Stanley and Danko, has shown us that many people live well and become wealthy by living below their means. The guy who drives used cars and lives in a modest house may be better off than you think. He’s just not as concerned about keeping up appearances.
People who decide to live below their means have more choices in their finances. They can deal with economic downturns more easily.
Smart spending leads to more choices for families. And smart decisions are paying dividends now.
Deborah Nayrocker is an author and columnist. She is the award-winning author of The Art of Debt-Free Living and Living a Balanced Financial Life.
Copyright 2008 by Deborah J. Nayrocker. All rights reserved.