Mortgage Rate News

Image by theamericanroadside via Flickr

Technically, the recession may be over, but that doesn’t mean that individual financial problems are just going away. That’s not really how it works when it comes to personal finances. Instead, things are looking kind of desperate for some folks. The cumulative effects of a weak labor market and tighter credit (not to mention the things credit issuers have been doing that mean hardship for consumers) will be hard to shake off, and the latest data about bankruptcy filings bears this out.

Indeed, the American Bankruptcy Institute offers this report on the number of bankruptcy filings in October:

The 135,913 consumer bankruptcy filings in October represented a 27.9 percent increase over last October’s monthly total of 106,266, according to the American Bankruptcy Institute (ABI), relying on data from the National Bankruptcy Research Center (NBKRC). The October 2009 consumer filings represented an 8.9 percent increase from the September 2009 total of 124,790. Chapter 13 filings constituted 28.5 percent of all consumer cases in October, a slight increase from the September rate.

“The nearly 9 percent increase in consumer bankruptcy filings in October, together with a 7 percent jump reported in business cases, demonstrates the sustained stress on the U.S. economy,” said ABI Executive Director Samuel J. Gerdano. ABI forecasts that total bankruptcies this year will exceed 1.4 million, the highest number since 2005.

This is a new high, and likely represents the hard times that people have fallen upon. Traditionally, most bankruptcies are caused by medical bills and expenses. However, I’m wondering if this most recent rash of bankruptcies is more the product of job loss and an inability to keep up with everything due to economic conditions. And, of course, in some cases it might be a strategic decision to start all over, much like a strategic default.

Of course, the increase in bankruptcies should also serve as an important reminder to the rest of us: It is vital to prepare our personal finances ahead of time. Emergency funds, paying off debt and proper insurance can help. Although, in some cases, there are situations so devastating, or so long-term, that no amount of preparation can avert a financial catastrophe.

Image by Getty Images via Daylife

Right now, many people are find it a rather tempting proposition to get a HELOC or some other type of home equity loan. After all, rates are quite low, and you can get a good deal. In some cases, you can get a HELOC for 1% below prime. And the prime rate is quite attractive right now. But you should be aware that in many cases you are getting an adjustable rate, and that means it is likely to go up soon.

Indeed, now that economists are saying that the recession is over, it is likely that you will see an increase in interest rates in the coming months. While it probably won’t be until well into next year before the Fed raises rates again, there is a likelihood that things will start picking up in the next couple of years. Which means that you need to be prepared. When the interest rate on a HELOC changes, it does so much like a credit card. No warning, no grace period, no caps. So you will have to make the new payment immediately.

If you have a HELOC right now, it is time to start considering your options. In some cases, it might be worth it to get a fixed rate mortgage when rates start to climb. You will have to prepare ahead of time by saving up money for closing costs and other expenses. Additionally, you will want to have good credit, so you will need work on seeing that your credit score is in good shape.

It is always a good idea to keep an eye on your finances, and this includes watching your interest rates, and understanding how they can affect your payments. A rise to your interest rate can suddenly make things difficult for you in terms of affording your payments and on other things. It is vital that you know how this works, and that you understand the implications of an adjustable rate, and how it can affect your finances.

Image by respres via Flickr

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?