Do Lower Mortgages Equal a Bigger Noose?

9 Dec

From the beginnings of this blog, I’ve been whining about high mortgage rates, expensive building costs, and the inability of “the common man” to be able to afford decent digs.

professor

And since the beginnings of this blog, I’ve also been telling you that you can build a house for less than the neighbors paid for their McMansion, and live as well, or better than they do, if you really plan carefully.

But, lately, I’ve been getting a lot of email about people jumping out of the “I’m gonna build it myself” boat, because they think that the failing economy will actually help them get into the house of their dreams, without picking up so much as a nail file.

abandonship

The commentary runs pretty much like this; “Ronin, with rates falling, I can just buy a house. My mortgage will be lower than the rent I’m paying, and we’ll still be happy.”

To those people, I say only: “If you’re sure about where you’re putting your feet, and your future, go for it. But be careful!”

But there is another side to this. A side that is just as dark as the “dark side of the force” that Darth vader made such an embedded part of our existence. We’re having to cope with our fear.

vader

As housing prices get more battering than the Deep South during Hurricane season, many people are just plain scared to enter the housing market.  Recent national surveys showed that 1 in 10 U.S. households with mortgages are either falling behind or already in foreclosure, a fact which is pressuring politicians in Washington to figure out ways to help distressed borrowers, and displaced families.

After all, all those families vote. You DO vote, right?

So, if all this talk about the Treasury playing with lending rates succeeds in getting mortgage rates down to 4.5%, should you take the bait and actually buy a new home?

According to CNN, The Treasury Department is actually considering a plan that will lower 30-year fixed-rate rates for home purchases to as little as 4.5%. The plan here is to stimulate sales, stop the veritable freefall of housing prices, and allow homeowners to go out and get bigger loans.moneyhouse
“Bigger loans?” Whaaaa? I’m not sure that’s such a good idea!

I took a look at the plan that the lackeys… um…er… politicians want to muscle through, and frankly, it appears that the proposed plan only helps those who buy homes, not those who want to refinance. If you couldn’t qualify for a home before, you probably won’t be able to qualify this time, either. All the usual rules will still apply, you must have a steady job and (pretty) good credit to qualify for these rates. Banks are still gonna be as tight-fisted as a greedy kid eating a Happy Meal. And, you aren’t going to be able to borrow more than the house is worth.

Low rates are a good thing, right? Should you bite the bullet, and buy that house you’ve been longing for? Hmmm?

Let’s take a hard look at how this could play out:

In the “Pros” column: You’ve probably never ever had the chance to buy a home with a 4.5% fixed-rate mortgage before, unless a seller or builder bought down your rate.

That’s a big carrot they’re dangling over your head. It’s so tempting that it just might entice fearful fence-sitters (who have been waiting for home prices to hit bottom) to rise to the bait, since it (and other stimulus measures like it) are most likely going to evaporate once the economy starts to improve.

If the government pulls this off, they’ll succeed in cutting rates to almost all-time low levels, and it will boost your buying power considerably. If you bought a resale home at the current median price of $183,300 and took out a loan for 80% of the purchase price, you’d pay $879 a month at a 6% rate. Do that very same thing at 4.5%, and you’re looking at a payment of $743 a month.

If you use your head, and forget about impressing your neighbors or In-Laws, and resist the temptation to buy more house than you can afford, you’ll be blessed with extra coins jingling in your pockets, each month. This is a good thing, because it’ll allow you to have more money to buy other consumer goods, like a new car or that new washing machine you’ve just been dying for. Plus, you’ll be “saving America,” by boosting the bottom line of retailers. That will help save jobs, and this has to happen, so that the economy can get back on track.

On the “Con” side: If you fall into the trap, and tempted by low rates, take on a bigger loan than you can afford, you’ll prove your In-Laws were right all along, and that you are indeed, an idiot. Think about it for moment, huh?

Unemployment rates are rising faster than an old geezer on Viagra. At a time when jobs are more scarce than good manners in the Mall, is this really wise? Aftrer all, you’re not just putting your financial future at risk — you’re just demonstrating that you haven’t learned a thing, and you’ll repeat the free-spending, McMansion-loving culture that created this horrible mess in the first place.

Are you sure that your job is safe?

Employers have cut 1.2 million jobs this year, sending the unemployment rate to a 14-year high of 6.5%, and economists expect that the rate will be higher when the Labor Department announces the next set of numbers, later this week. This is just the beginning, folks. Analysts say that the lay-off numbers we’ll be seeing in the first half of next year will make you cringe.

Under these circumstances, many of you should wisely decide to stay where you are rather than move, even when mortgage rates have declined. Though the average rate for 30-year fixed-rate mortgages fell to 5.47% from 5.99% in the week ending Nov. 28, applications for refinanced loans rocketed 203%, while loans to purchase homes rose only 38%, according to the Mortgage Bankers Association. So, new home money isn’t exactly flowing out the bank front doors yet.

Here’s the bottom line: If you can get a lower fixed-rate loan than you have now, either for a new purchase or a refinance, you’d be foolish not to take it. But there’s no reason that you have to use the money for a bigger house, or a bigger loan.

Do the smart thing.

Live within your means, and don’t take on any new big-ticket liabilities.

Downsize your expectations, and pay down your home and credit debt!

And you’ll be better prepared if you yourself get downsized, as our economy gets worse, before it gets better..

Those “Little House” nuts don’t look so crazy now… do they? Hmmm?

Stay tuned!

The Renaissance Ronin

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3 Responses to “Do Lower Mortgages Equal a Bigger Noose?”

  1. wildkitty December 9, 2008 at 8:23 pm #

    I don’t have any in-laws – so I have no worries – right?

  2. wildkitty December 9, 2008 at 8:34 pm #

    BTW, your blog’s reading level is rated at Junior High level. I now believe this computer generated data to be faulty. Either that or I’m stupider than I thought since I have to slow down sometimes to grasp what you’re trying to say! 😮

  3. renaissanceronin December 10, 2008 at 12:23 am #

    wildkitty: Hey there, if it isn’t my favorite “train stalker GILF!” LOL!

    I suppose that if you find yourself “In-Law-less…” first, you should celebrate like it’s 1999! Then accept the grim realization that any mistakes you make, are all yours and you have no one else to blame…

    And, it’s not my fault that your computer can’t understand my computer’s brilliant postings. You must have a MAC… LOL! Actually, it’s probably suffering under the same realization as everyone else’s computers, and I’m thus revealed as illiterate, and hard to understand. Don’t feel bad, I’m just living in a different parallel universe than everyone around me. My wife says the medical term for my condition is that “I’m F*cking crazy.”

    I’ll buy better crayons, next time, I promise.

    Ronin

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