The Subprime Mess: What it Means to You

The bad news about the housing market seems never ending:  Foreclosures have more than doubled over the past year.  Whether you're a home seller, owner or buyer, by this point you've got to be feeling a little rattled.

All that has happened before problems in subprime lending expanded throughout the mortgage market and beyond, creating what's being referred to as ''the credit crunch.''

The immediate future is clear:  As lenders tighten their borrowing standards, fewer people qualify for mortgages.  Fewer qualified buyers can only mean that housing prices will slump further.  Worst of all, economists don't see much chance for a turnaround until mid- 2008 and possibly into 2009.

Ready for some good news?

First, remember that all real estate is local, and some markets are doing just fine.  In fact, more than half of the major housing markets in the country have yet to see prices drop.  Homeowners who plan to stay put for a while may not have anything to worry about.  And if you're a buyer - well, this market may be the opportunity of a lifetime.

Sure, it's harder to get approved for a mortgage these days.  But if you can clear that hurdle and have enough money set aside for a down payment (count on needing at least 10 percent, and increasingly as much as 20 percent), you're golden, with more listings to choose from, at better prices and with a lot less competition.

Remember, prices may continue to fall for another year or two, so once you have a handle on the market, bid low.  If the seller won't budge, walk away.  There's no shortage of homes for sale.  Sellers, you need to be keenly aware of this fact and remain realistic about today's market.  Unlike a few years ago, sellers can't call the shots all the time now.

Don't be afraid to press for noncash concessions.  Sellers may be willing to pay a portion of your closing costs or provide a home warranty covering repairs for the first year.

If you're buying a new home, your builder may give you a cash rebate, plus free upgrades such as granite countertops, a Sub-Zero refrigerator, hardwood flooring or a big-screen TV.

Builders are also more willing to pay closing costs or buy down the rate.  For them this is a desperately tough market.  But that's not your problem, is it?

Making Extra Payments

The concept of debt reduction and making extra payments have been around for quite some time.  Several financial planners and gurus teach this method.  Debt "rolldown" is the idea of using your extra money to paydown your smallest debt first, and then using the money you were spending on that debt to paydown your next biggest debt, etc.

Many disagree with this concept for several reasons.  First, when you begin making extra payments, you never have access to those funds again.  You can’t call the credit card company and say “I need the extra payment back because the transmission just went out on my car!”

Secondly, these plans usually recommend not to use any credit cards.  Credit cards can actually be a tremeandous tool if used correctly.  The problem of course is most poeple use credit cards the wrong way and carry a balance and incur interest charges month after month.  It takes alot of discipline and hard work to follow an extra payment plan.  It’s very important to have an emergency fund!  With extra payment plans you're trying to use every spare penny you have to pay-down your debts.  This doesn't allow any flexibility in case something unexpected comes up. 

When you stop and think about how you manage your money you'll find you're helping the bank but may be hurting yourself.

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Refinancing Your Home

Refinancing your home can be an excellent way to lower your monthly mortgage payment, raise cash, or consolidate debts with high interest rates.  However, you need to do your homework before deciding to refinance. 

One important factor is the difference between current interest rates and the rate of your original loan.  You also need to take into account the amount of time it will take to recoup the costs of refinancing.

Keep in mind - refinancing usually lengthens the time it takes to pay off your mortgage.  If you are 3 years into a 30-year mortgage and then refinance with a new 30-year loan, you'll end up making payments on the house for 33 years.  Nevertheless, if the monthly savings are substantial enough, you still could end up paying much less over the long haul with the new loan.

Be careful of lenders offering 100 or 125 percent home equity loans, as their rates are often markedly higher than traditional lenders.  In addition, any amount you borrow that is above the market value of the house is NOT tax deductible.  Check with your tax professional on this.

Talk with your lender about the different types of refinancing loans available today.  You should take some time to shop around and speak with several lenders before making a decision.  Be sure to discuss all the expenses and benefits, as well as what will be expected of you, in advance.  The more you educate yourself, the better your chances of finding the right refinancing package.

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Real Estate: No Light in Sight

For those in the real estate industry and for those looking to buy or sell a home, it could take until 2009 to catch a break.

That's the forecast from Doug Duncan, chief economist for the Mortgage Bankers Association (MBA).   Duncan expects national median home prices to fall between 2 percent and 4 percent both this year and next. Prices will be held back by an oversupply of homes for sale, an increase in foreclosures and continued uncertainty among mortgage investors.

For this year, Duncan is predicting a 22 percent drop in new home sales and a 12 percent drop in existing home sales, followed by a 10 percent drop in each next year.

What? No good news?

There's one group of home buyers, home sellers and loan originators who will have an easier time of it than everyone else: those dealing with "anything that's conventional and conforming," Duncan said. In other words, 30-year fixed rate mortgages for borrowers with good credit under the "jumbo" cutoff of $417,000.

Home Heating Bills Will Increase

No matter how you heat your house, this year will cost you more than last, according to a government report issued recently.

Americans will spend $977 to heat their homes this year, averaging for all fuels across all sections of the country, according to the Energy Information Administration.

That's nearly 10 percent higher than the $889 spent last year and the highest amount ever, not adjusted for inflation.  The previous record was $948 in 2005-2006, according to EIA.

Those heating with oil can expect to pay $319 more this year compared to last.  Natural gas users, accounting for more than half of U.S. households, can expect to pay 10 percent, or $78 more this winter.

In addition to citing higher fuel prices, EIA said this winter is projected to be 4 percent colder than last - although still about 2 percent warmer than the 30-year average. Colder temperatures this winter compared to last account for some of the rise in heating costs.