When Mortgage Debt is No Longer the “Best Debt”

A long time ago, burning your mortgage once it was paid off was considered almost a rite of passage. Young couples would buy a house with the intent of raising a family there and staying in that house their whole lives. It’s a beautiful plan that worked for many Americans. Even those who managed to avoid debt don’t mind mortgage debt (as long as their payments are affordable) because it was considered the best kind of debt. You could write a portion of it off on your taxes, so it was more acceptable.

Through the years, that has changed. Women stay single longer and have careers of their own. They might even choose to buy a house on their own. It may not be exactly the kind of house they want, but again—mortgage debt is good debt…right? They are building equity instead of throwing their money away on rent. Men are doing the same thing. That being said, there are couples who marry in their mid-20s and live in apartments until they get married. Then they might buy a “starter house,” meaning they know they can’t afford the house of their dreams yet, but they can build equity in something until they can afford to move on. A starter home for single people or young couples is typically not what they expect to stay in the rest of their lives, so they move on to something bigger and better when the time is right. All of those are good plans. The key is to keep it affordable. But all too often, real estate prices far exceed incomes, and the dream of home ownership seems, for many, like it will never come true.

As of the 4th quarter of 2015, only 36% of U.S. households carry mortgage debt. And that’s okay—unless the homeowner has bitten off more than they can chew, or reach retirement age and still have a big mortgage to pay on a more limited income.

Ideally, when you get a mortgage you can put at least 20% down, but earlier in the 21st century, mortgage lenders were offering mortgages with no money down, interest only loans and no-doc loans. All of these loans were designed to help people get a house or get the house they really wanted now, even if they can’t afford it. These loans were risky for mortgage lenders, so the interest rates were a little higher. Then in 2008 and 2009, it all came crashing down. Foreclosures were at an all-time high and mortgage brokers and lenders that seemed to come up out of the woodwork in the late 1990s and early 2000s were losing their jobs and shutting their doors. Why? Because too many people had mortgages they could not afford, which left them seeking mortgage assistance.

When people were in over their heads with mortgage debt and didn’t want a foreclosure in their credit history, lenders began to accept “short sales.” A short sale is when the lender agrees to accept less for a property than what is owed. It’s very similar to debt settlement except you’re dealing with real estate instead of credit card debt and other unsecured loans. Buyers of short sale homes win because they get a great house at a lower price. Sellers win because they didn’t have to go into foreclosure. And lenders? Well, I won’t say they win, but the saying “something is better than nothing” would certainly apply.

Were you, or are you now, in over your head when it comes to mortgage debt? Contact me. I’d like to hear your story.