SMCU Money Masters - Winter 2008 - (Page 8)

the motley fool Those who refinanced to fixed mortgages early in 2007 couldn’t have had better timing. Rates on fixed mortgages rose half a percent or more shortly thereafter, which could have stretched those with already strained budgets beyond the point where they could afford a fixed loan. And there’s no guarantee that rates won’t keep rising. A Tale of Two Subprime Woes Continue For subprime borrowers, on the other hand, the story was much different. Far from embracing fixed-rate mortgages, less creditworthy borrowers seemed to be doubling down, in hopes that a combination of recovering home prices and more favorable rates would bail them out. Three-quarters of all subprime loans originated in the last half of 2006 were ARMs, up from two-thirds in the first part of the year. Even as rates have risen, many subprime borrowers continue to use their homes as a source of cash for other uses; 87 percent of all refinancing loans were for the purpose of taking out additional cash. It’s disheartening to see subprime borrowers failing to learn from their past mistakes. Yet as the housing market fluctuates, homeowners who were forced to take huge risks may be getting increasingly desperate to try to maintain their standard of living. Moreover, it’s clear that subprime borrowers continued to find sources of funds for new loans in late 2006. Yet those sources may now be drying up. Many players in the subprime lending business have dropped out of the game. As losses loom, more big lenders may decide the potential profits from subprime just aren’t worth the risk. And as default rates rise, those lenders who remain willing to make these loans will offer even less favorable terms. Yet, with little power to negotiate, many borrowers will have no choice but to take whatever money they can get. Borrowers Rising interest rates have given many By Dan Caplinger homeowners a nasty surprise on their mortgages over the past year. Yet while some have taken the opportunity to refinance to fixed-rate mortgages, the most vulnerable borrowers continue to rely on riskier financing that could cause even more problems. Recently, the Mortgage Bankers Association came out with two reports. One focused on the mortgage loan market overall, while the other took a closer look at lending to subprime borrowers. The contrast between the two reports was eye-opening. Calling It a Day Unfortunately, many homeowners never consider that they may not really be able to afford the home they own. As painful as it is to give up your home, it’s not worth risking financial ruin to stay in a home you can’t pay for. Before you give up on your dream of owning your home, look at all of your mortgage options to see if you can improve your situation. Perhaps a makeover of your financial plan could uncover enough money to make ends meet. Whatever you decide, it’s better to know exactly what you face than to stay in denial, letting your bill pile grow larger and larger. Taking action is the best way to solve problems and keep things from going from bad to worse. Fool contributor Dan Caplinger is holding his own with a fixed-rate mortgage. Retreating to Safer Ground The general survey showed that borrowers are moving away from risky adjustable-rate mortgages (ARMs) toward fixed mortgages. Three out of every five mortgages during the second half of 2006 had fixed rates, compared to just over half in the first six months of the year. Apparently, many borrowers are wary of the payment shock that comes when higher rates kick in on their ARMs. 8 WINTER 08

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SMCU Money Masters - Winter 2008 Contents Tech Tips Community Connection What’s Next? Motley Fool: A Tale of Two Borrowers Jean Chatzky: Extreme Jobs Member Tips Money Management

SMCU Money Masters - Winter 2008

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