Tips for inflation-bitten budgets to conquer mortgage payment struggles

Seniors and people working in real estate are struggling to pay their bills amid rising costs or lost income.

By JEFF LAZERSON | jlazerson@mortgagegrader.com | MortgageGrader.com | September 13, 2023

Article originally posted in Orange County Register on September 07, 2023.

Of late, I’ve experienced a noticeable uptick in calls from financially stressed borrowers trying to stay on top of their monthly bills.

This recent, surprising rash of “how do I make ends meet” calls haunts me a bit, recalling my earliest column-writing days of 2011. Folks were desperately trying to save their homes from foreclosure.

So what’s happening?

Mortgage delinquencies are almost non-existent. And a scant 0.39% of mortgages are in a forbearance plan from the COVID tracking days, according to July data provided by the Mortgage Bankers Association.

Home purchase applications have slid to their lowest level since April 1995, according to data released this week from the MBA. With high interest rates, homeowners are locked into low rates and not budging, squeezing inventory of for-sale homes.

The national unemployment rate is a super low 3.8%.

Exactly who are the people treading in choppy mortgage waters?

Hands down, I’m getting more calls from struggling seniors on fixed incomes who are contemplating various ways to get by, including a part-time job (think Costco sampler), a reverse mortgage to end the monthly house payment or selling and moving to cheaper quarters.

Unexpected long-term care or skilled nursing needs and inflation seem to bite the worst. Many of these mortgage holders have owned and lived in their homes for a very long time.

The second most frequent calls come from folks in real estate and related businesses. They are largely self-employed or paid as commission-driven contractors. These struggling industry peers are generally interested in home equity lines of credit as a survival mechanism. But their liquid reserves are quickly drying up.

Disrupted workers and the ripple effect sit in the third bucket. Thousands of Southern California entertainment industry workers started striking May 2. Others followed. Don’t forget laid-off tech workers. All these paycheck stoppages hurt the overall economy when they stop spending.

 For those using borrowed funds, inflation and higher interest rates are quietly contributing to money woes beyond the more obvious higher costs for gasoline, utilities, insurance and groceries.

The prime rate was 5.5% one year ago. Today it’s 8.5%. This means everything from credit cards, auto loans and most other consumer goods are costing a lot more.

Take a $250,000 home equity line of credit, assuming the prime rate plus a 2% bank profit margin. HELOC rates typically change monthly as the prime rate changes. Last year at a 7.5% rate, the payment was $1,562. Today, at 10.5%, the payment on that same $250,000 loan is $2,187, an astounding 40% higher. And we’re going to see one more Fed quarter-point rate increase (to 8.755%) before the calendar flips to 2024.

Mortgage rates are near a 22-year high with Freddie Mac this week down slightly to 7.12%.

The average Freddie Mac five-year adjustable-rate mortgage was 3.93% on Sept. 6, 2018. If you have a 5-year-old ARM, it’s likely going to increase 2% over your introductory rate.

Freddie stopped reporting ARMs after Nov. 10, 2022, when the survey showed an average 6.06% rate. Today, the best five-year ARM I could find was sitting at 7.125% with 2 points cost. So, no relief there.

How do you know if you are financially circling the drain? And what can you do to stop the financial bleed before you start missing mortgage payments, ruining your credit and start considering bankruptcy protection for example?

Newport Beach bankruptcy attorney Michael Nicastro recommends spending a little bit of time every month on the family budget.

“Be conscious of what is going on. Be conscious of your financial decisions and your spending,” he said. “Don’t just spend money (impulsively).”

More than anything else, I always tell people to watch their cash reserves. Let’s say all your monthly household expenses are $8,000. You have $20,000 in liquid reserves at your bank. But you are only bringing in $5,000 per month after payroll taxes, for example. Assuming no emergency money is needed, you are underwater by $3,000 per month. You have less than seven months to find more income and cut expenses.

Luckily for every financially stressed borrower, today’s housing market is completely different than the haunting mortgage meltdown days of the Great Recession.

Chances are you have significant home equity (the value of your home minus any mortgages). If need be, you may be able to tap into your home equity. Mortgage holders withdrew $39 billion through a combination of either first- or second-lien home equity lines in the second quarter, according to Black Knight.

If you do become short of cash and are forced to let a payment slide, the largest payments most adversely affect your credit scores, according to credit expert John Ulzheimer.

“Other than the fact you can (also eventually) lose your home through mortgage lates, large delinquent amounts are worse for your credit score,” said Ulzheimer.

It’s better to be late on a smaller dollar amount student loan than your larger mortgage payment. How many points does a 30-day-late mortgage affect your FICO score? “There is no single answer,” he said.

HUD has extended its COVID-era hardship options through Oct. 31, 2024.

For example, FHA borrowers might be able to receive payment forbearance for three to six months.

Another outstanding tool available for FHA borrowers is something called a partial claim. Borrowers can get a zero-interest loan for up to 30% of the existing mortgage balance to cover previously delinquent mortgage payments. The money is never given directly to the borrower and instead is paid to the mortgage servicer. The debt is not forgiven but is instead added to the back of the mortgage. It gets paid back either when the homeowner sells or refinances the existing mortgage.

“We are hoping for the best and preparing for the worst,” said a senior HUD official.

Another resource is any HUD-approved housing counseling agency. They are well versed in supporting challenged mortgage borrowers, regardless of whether they have an FHA or Fannie or Freddie conventional mortgage.

So, who is being forced to sell in the current market?

“Trusts (when a family member dies), divorce, job losses,” said Bob Diersing, First Team real estate agent.

Freddie Mac rate news: The 30-year fixed rate averaged 7.12%, 6 basis points lower than last week. The 15-year fixed rate averaged 6.52%, 3 basis points lower than last week.

The Mortgage Bankers Association reported a 2.9% mortgage application decrease compared to last week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $726,200 loan, last year’s payment was $587 less than this week’s payment of $4,890.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with 1 point: A 30-year FHA at 6.5%, a 15-year conventional at 6.5%, a 30-year conventional at 6.75%, a 15-year conventional high balance at 7% ($726,201 to $1,089,300), a 30-year high balance conventional at 7.375% and a jumbo 30-year fixed at 7.25%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $726,200 in LA and Orange counties.

Eye catcher loan program of the week: A 30-year VA fixed rate at 5.875% with 2 points cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

If you enjoyed this article and want to receive weekly mortgage news for FREE, sign up for the newsletter HERE.

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.