Subprime Borrowers Urged to Protect Their Financial Futures
WASHINGTON, D.C., October 17, 2007 — The president of the Financial Planning Association® (FPA®) says homeowners on the cusp of foreclosure due to subprime loans need to evaluate their options now, and not wait for a foreclosure notice before taking action.
Federal Reserve Chair Ben Bernanke and Treasury Secretary Henry Paulson, in separate speeches, warned on Tuesday that the mortgage crises faced by thousands of homeowners is not going to go away any time soon and may actually deepen over the coming year.
“They have now made it clear that this mortgage mess is going to be with us for a while,” said FPA president Nicholas A. Nicolette, CFP®. “When the Fed chairman and the Treasury Secretary have the same message on the same day, it’s time for some home owners to start evaluating options.”
FPA is advising homeowners who are caught up in the sub-prime mortgage crises to think twice about their choices when trying to hang onto a house that may drag down their entire financial future.
“There are options to consider. You can look into whether you can convert your adjustable rate mortgage (ARM) into a fixed interest rate mortgage or one with a more affordable payment schedule. But if there are not viable options to choose allow me to say that which nobody wants to hear,” said Nicolette. “If that house you bought with an ARM is increasingly putting a squeeze on your effort to save for retirement or money you are setting aside for your kid’s college education, you may want to consider selling the house, even if it means taking a loss.”
Over the next two years nearly 2 million people could lose their homes to foreclosure. Nicolette said if people crunched the numbers they might quickly see that carrying an expensive mortgage payment every month can put them into dire straits for years to come and tie up what experts call “liquidity,” leading to borrowing by credit card and abandonment of a monthly saving regimen.
“It’s too easy for people to turn up their nose at a purchase offer that is below what they may have paid for their home,” said Nicolette. “But in the long run they may be better off than trying to hang on to a property that has left them strapped for cash or could ultimately lead to a foreclosure or bankruptcy and destroy their credit rating.”
FPA is advising those facing foreclosure or those who simply can’t afford a house payment that has climbed with the interest rates to consider several things which may help them out:
- Talk to your mortgage lender. Most lenders don’t want to be own real estate and they might find a way to work with you. In a worse case scenario it won’t cost anything to have that conversation.
- Consider even a low offer to purchase your home. Consult your financial planner as well as your Realtor® to see if a low sale price might actually help your long- term financial outlook.
- Never lose site of your real estate-to-liquid asset ratio when you consider buying or selling a house.
- In addition to your Realtor®, if at all possible consult with a competent, ethical financial planner who can analyze your budget and cash flow. A financial planner who is registered as an investment adviser is required to put your interest ahead of their own and disclose any conflicts of interest. Quite simply, that translates to credible and objective advice.
Financial planners recognize that in too many cases the purchase or sale of a home is governed as much emotion as by a spreadsheet. But when that dream home becomes the stuff of nightmares, then difficult decisions are necessary.