With the economy tanking and going nowhere, the housing market is not terribly great. Because of the bad economy, you hear a lot more about home foreclosures in the news, on television, and even on the radio. Given the surge of subprime lending and house flipping, home foreclosure is of course the inevitable result of overinvestment by people that either got unlucky or perhaps were foolish in their ideas of what they could or could not afford.
The real question you might have is this: What Is Home Foreclosure?
Home foreclosure is a pretty simple thing. It is when you have a loan on a house that is unpaid and thus goes into default. At that point a series of things can happen. It’s possible that the bank might renegotiate the terms of the loan such as the loan rate. Then again, most of the time what tends to happen is that the bank or the originator on the loan will try to sell the house on the open market.
Usually banks tend to work with the same handful of realtors who are comfortable with the entire process of selling or buying a foreclosed house. If it is a government house foreclosure, then they almost always use the same realtor or real estate agency in your town.
The house will sit on the open market for a period of time until either it sells or the mortgage company or bank decides that they need to sell the property quicker. In those instances, they will either slash the price on the house or they might sell the house via auction.
House foreclosure auctions are a whole different ball of wax and I won’t go into it in this post. In some cases a home auction can get you a house for less than 50% of original value. Recently, I’ve seen reports that in Detroit some of these house auctions or even just straight up foreclosures were being bought for $100 or even $1,000.
Those kinds of prices are absolutely outlandish, but it just shows you how bad the housing market is right now in different parts of the country. The manufacturing centers are being hit hard right now, so houses can be had for next to nothing. The only problem is that there is nobody around to actually buy them. Go figure right?
What You Need To Know….
What you need to know about home foreclosure is that if your house is being foreclosed on, you do have options. It is not in the bank’s best interest to have their loan in default. They lose a lot of money on the loan if that is the case. Also, if they have only had your loan for a year or two, they probably are barely at break even in terms of interest payments vs. their cost.
If you are in an adjustable rate mortgage right now, you should try to get into a fixed rate mortgage. A 30 year morgage is around 5% and a 15 year mortgage is hovering around 4.5%. Those kinds of rates are outstanding. Simply outstanding. You can’t beat them.
When I first bought a house I had an adjustable rate mortgage and it was awful. I think we were paying something like 11% or higher interest rate. Our house was very cheap, like less than $100,000. We could barely afford it, but a few years later we got locked into a 15 year 5.25% mortgage. Our monthly payment is the same, but we’re going to pay off the loan in less than half the time.
There’s a lesson to be had there for you home buyers. If you are buying a house or have a loan, get a shorter loan period. It costs a little more each month, but that money goes towards the principal on the loan, nto the interest. That’s a HUGE money saver, but I digress.
Here’s What To Know When Buying A Home Foreclosure….
When you are buying a foreclosed house, or any house for that matter, you should know that you’ll only make money when you buy the house, not when you sell it. Let me repeat….
You only make money when you buy a house, not when you sell.
That is the single biggest reason so many people got in over their heads in this latest housing crisis. They all thought they could buy at market prices and since market price kept jumping, they’d be stupid rich in a couple years because prices only go up right?
Well as it turns out, house prices can and will go down at various times for various reasons. So, if you are buying a house, whether it’s foreclosed on or not, if you want to make money from your investment you need to do it on the original purchase, not when you sell it.
So, for those people who are good at math, if you want to make $10,000 on your house when you sell it, you need to actually purchase it for $10,000 less than it’s worth. Ideally, you would purchase for $20,000 or more less than market value so that if the market value drops, you still are $10,000 ahead on the deal. I call this purchase concept “buying equity“.
It’s similar to when you purchase shares in a company. You are buying an equity stake in the company. Usually when you purchase a house, the only equity you have in it is the down payment. When you buy something for less than it’s worth you have instant equity. That means you could turn around and borrow against that equity if need be.
If you are g0ing to save yourself a truckload when buying a house, you need to buy it for less than it’s worth. Period. That’s how the smart people purchase property. If you are buying for market value and hoping that the market will keep going up, you might as well buy a lottery ticket.
Wow, I think I may have got a bit off track here, so I’ll close it up with this simple thought…
Home foreclosure is a serious thing for both the borrower and the bank. Don’t take it lightly. However, it’s also a way to keep our financial system in check. The risk of foreclosure is supposed to keep banks from over-extending credit to people who aren’t going to be good borrowers. At the same time, if people can’t afford to pay their bills, they don’t always deserve to keep their house no matter how much they would like to.
In the end, a home foreclosure is kind of like a band aid. It helps in some cases, but you’d wish that you didn’t get cut in the first place.
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