Low Refinance Rates Won't Help Everyone, But You Can Help Yourself

The general perception is that the housing crisis is behind us, but some new warning signs suggest there may be more trouble ahead.

The emergence of fresh trouble spots in the mortgage market is a reminder that financial difficulties are always lurking, ready to strike. Staying out of trouble depends on steps you take throughout the life of your mortgage, from application to final payment.

Is New York the New Florida?

New Yorkers have long had an affinity for Florida, with people from Long Island to Buffalo fleeing the winter months to visit Miami, Orlando, Tampa, and other warm refuges. However, New Yorkers may be expressing their affinity for Florida in a new and disturbing way, by mimicking some of the same foreclosure problems that have plagued the Sunshine State.

When it comes to mortgage foreclosures and delinquencies, there is a jarring contrast between the general improvement of the big picture and disturbing trends in New York and neighboring states. According to the Mortgage Banker's Association, the rate of mortgage delinquencies nationally recently fell to the lowest level since mid-2008, while the percentage of new foreclosures dropped to the lowest rate since early 2007. Those figures fit with the general impression that mortgage conditions are improving across the country.

What doesn't fit with that rosy outlook are the figures for New York, New Jersey, and Connecticut. New York's rate of new foreclosures recently hit an all-time high, and is now roughly as bad as Florida's. Foreclosure percentages are also near all-time highs in Connecticut, while New Jersey's are comparable with such trouble spots as Arizona, Nevada, and California.

Fat + Dumb + Happy = Foreclosure

These new outbreaks of mortgage delinquencies and foreclosures are a reminder that there doesn't have to be a nationwide housing crisis for serious problems to affect individual states, neighborhoods, or families. If things are going well for you, congratulations -- but don't get complacent. An understanding of the risks involved should inform every decision you make about mortgages, including refinancing and home equity loans.

One of the toughest things about mortgage problems is that by the time people become aware of them, their options are limited. According to the Bureau of Labor Statistics, when Americans lose their jobs these days, it takes an average of 36.6 weeks to find new work - a span of time during which about eight mortgage payments will come due. People with financial problems may find themselves unable to refinance a mortgage to save money. The same goes for people who happen to live in a neighborhood where housing values have dropped precipitously.

Keeping Your Mortgage Out of Trouble

Since your options may be limited once mortgage troubles strike, it's best to focus on avoiding them in the first place. This starts with your very first decisions about your home and your mortgage. Here are six ways to keep your mortgage out of trouble.

  1. Buy what you can afford. People look for many different things when they buy a home -- perhaps a grand impression, a great location, or room for their families to grow. Still, a common denominator should be comfort, and that starts with choosing a home you can readily afford. Use home affordability calculator to find your target home price, and don't sign up for a payment that will stretch your budget. Impressing others is never as important as sleeping well at night.
  2. Sweat the details. Something as simple as shopping for mortgage rates can save you money every month for the next 30 years. In other words, sweating the details is well worth the time and effort.
  3. Secure your payment. Unless you have a specific game plan for paying off your mortgage in a few years, lock in your payment with a fixed rate loan. An adjustable-rate mortgage may offer you a lower rate initially, but you will be gambling that all future payments will be equally affordable. If you do plan to sell, pay off, or refinance your home in a few years, hybrid ARMs with rates fixed for 3, 5, 7 or 10 years can be a bargain.
  4. Don't hesitate to refinance for lower rates. Keep in mind that when refinance rates are attractive, there are at least three moving parts that are subject to change - those refinance rates, the value of your home, and your financial situation. You need to pounce on opportunities to save money by refinancing your mortgage, because they may prove to be fleeting.
  5. Use home equity judiciously. Some of the saddest foreclosure stories in recent years involved people who'd been in their homes for ten or fifteen years, and yet couldn't refinance because they took out home equity loans and were under water. Your home equity is precious, so treat it that way. Using home equity to finance short-term spending may be squandering that valuable asset.
  6. Treat your credit rating like an investment. A good credit rating may qualify you for lower mortgage rates initially and better refinance rates in the future. A bad credit rating will probably force you to pay more financing, if you can even get it. Treating your credit rating with the care you would put into a major investment will help you get a good return on that investment.

Recent foreclosure trends in New York, New Jersey, and Connecticut will bring a fresh wave of hard-luck stories from people faced with losing their homes. Make sure you aren't the subject of one of those stories.

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