Mortgage Rate News

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The first time home buyer tax credit has been extended — and expanded. The $8,000 credit has been extended by six months, and there has been an expansion to include current home owners who want to buy. Current home owners can get a $6,500 tax credit when they look for a new home. This is along the lines of the tentative agreement reached last week. Bible Money Matters offers a great summary of the main points for the new $6,500 tax credit:

• The credit is available for homes that go under contract by April 30, 2010 and close by June 30th, 2010.
• Current homeowners can claim a $6,500 credit as long as the property they are vacating has been their primary residence for at least five consecutive years out of the last eight years.
• Income limits: $125,000 a year for individuals, $225,000 a year for married couples. (these are higher limits than before)
• Homes that cost more than $800,000 aren’t eligible for the credit.
• $6500 tax credit is not retroactive.  (from the language of the bill: “shall apply to residences purchased after the date of the enactment of this Act.”)

Sadly, I don’t qualify. Which is okay, I suppose. We weren’t planning on moving any time soon, so it’s not like we would use it anyway. But it would still be nice to know that if we wanted to take advantage of such a great deal, we could. It’s not $15,000, but it’ll do. It’s better than nothing.

However, the tax credit extension is also expected to help keep home prices higher. The Wall Street Journal reports on the first time home buyer tax credit and its results:

Goldman Sachs estimates that the credit resulted in 200,000 sales this year, but that many of those sales were front-loaded—driven by a surge in sales shortly after the tax credit took effect. The simple extension “should result in fewer incremental first time purchases than the first round of the credit did,” writes Goldman economist Alec Phillips.

While the tax credit won’t reduce excess inventory, the incentives could keep prices up because “potential sellers are likely to incorporate a fraction of the credit amount in their sale price—with the knowledge that the majority of buyers will qualify for either the first time or move-up credit,” writes Mr. Phillips.

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The news, of course, is that the recession is over. But, even though there has been a technical end to the recession, it doesn’t mean that things are suddenly going to get better. Indeed, there are still foreclosures likely, and the unpleasant fact that many people still can’t afford their mortgage payments — whether they got a home they couldn’t really afford in the first place, or whether they fell on bad luck and job loss during the recession.

As it looks as though more foreclosures could be coming in the future, and the housing market may dip again, it is little surprise that some are starting to look around for a solution to their problems. And, in some cases, the solution is presenting itself in what is known as strategic default, or foreclosure on purpose.

Walking away from your home mortgage loan

Some markets have been so hard hit, and will probably take so long to recover, that there are those that feel that the only viable option is to allow foreclosure. Indeed, Mish’s Global Economic Trend Analysis shared a letter from someone who recommended just such a course of action:

I said the answer was easy, walk away. In fact, I told her I would stop paying the mortgage and see how long it took them to foreclose. She might be able to live there 6 months or more rent free.

Her fiancé was there and he didn’t agree with my answer. He said that her credit would be ruined for ten years and that the value would come back. I responded that a foreclosure would stay on a credit report for 10 years, but if you work hard at re-establishing your credit, the score can come back in a year or two.

I have seen people plenty of people with credit scores over 700 within one year of a bankruptcy or foreclosure. As far as the value coming back, I told him that it would take 10 years or more before that value comes back.

It’s an interesting thought. But in some cases, foreclosure can be a way to get a new start — as long as you aren’t too emotionally invested in staying in your home.  But if you decide that strategic default is the way to go, you should have a plan to rebuild your credit. The letter writer on Mish’s suggested that you have a credit card and a good car. You won’t be able to get a good rate on a car loan, so you need a good one. And you need a credit card to help rebuild your credit. Just don’t max out the credit card.

What do you think? Is strategic default a viable option in some cases?

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Many people have been trying to time the market, waiting to buy when the housing market hits bottom. However, there is an argument that the housing bottom has passed, and that the chance to buy at the bottom was earlier this year. With the Case-Shiller index showing that the housing market is improving (despite issues related to home sales recently), there are some that argue that the time to buy was back in February.

Here is what The Mortgage Reports says about the economy, housing market and when to buy:

But now, as the Case-Shiller Index shows improvement, it’s making a case that the economy is coming back from the brink.

An improving economy will harm home affordability.

Soon, government stimulus will fade, mortgage rates will rise, and sellers will regain the upper-hand in negotiations. Based on the Case-Shiller home value data, the “right time” to buy a home may have been in 7 months ago — while the status of the recovery was still in doubt.

Of course, there are concerns that there could be a double dip recession, with another drop on its way. Indeed, some are speculating that the housing market could dip again next year as government aid is withdrawn and unemployment stubbornly refuses to improve. That could mean another housing bottom that could provide buying opportunities.

If you are planning on buying, though, there is no reason to keep trying to time the market. Mortgage interest rates are still relatively low, and it’s still a buyer’s market. The only thing I’d wait for is to give it a few weeks to see if Congress decides to extend the home buyer tax credit deadline, and expand the program to include those who are not first time home buyers. In the end, you are unlikely to find such deals for another decade or so, and getting in now is a fairly good plan, especially if you are simply buying a home to serve as your primary residence.