I just heard on the Fox News tonight that foreclosure notices in San Diego County jumped to its highest level in two years, at a nearly 60 percent rise. Although this number might sound high, we have to closely examine the reasons behind it before we can come to a conclusion.
Home values in San Diego County no longer increase in double digits as many of us were used to during the past two years. So far we only see a modest increase in the low single digits, much needed for a healthy real estate market.
During the past two years many real estate investors, who saw an opportunity to make a quick healthy profit, purchased an investment property with the thought to “flip” it after a year and cash out. Quite a few were successful as home values kept increasing in double digits but some who bought last year weren’t as lucky, as the market started leveling during the last quarter of last year. These investors are trying to sell their properties today, at an inflated price that will pay their selling expenses plus net them a double digit profit. Well, they see that their property stay in the market unsold due to inflated (for today’s market) and knowing that if they sell it for just a single digit profit they will end up at a loss, especially the ones that bought their property with an “interest only” 100% loan. They have no equity and by selling means that they will have to pay some of the selling expenses, including possible loan penalties, out of their pocket. So what do they do? Skipping the monthly loan payment to the lender! In my opinion these types of investors are a big percentage from that 60 percent rate increase in foreclosure notices.
Another big percentage of the 60 percent rate increase is the “no money down” first time buyer, who in order to have a low monthly payment in the first few months, purchased their home with either an interest only or a low “starter” adjustable rate mortgage. As we see today the mortgage rates have increased, that “starter” adjustable rate has probably doubled, meaning obviously that their monthly mortgage payment has also doubled. They can’t afford the increased monthly payment and knowing that they have no equity in their property they can’t sell to pay the lender.
As it was also reported, only about 5 percent of homeowners who find themselves in default actually lose their homes to foreclosure.
So what can you do to avoid possible foreclosure?
- Do not buy a home thinking that you can “flip” it within a short period of time, especially when getting a 100% loan.
- When buying a home, do not get a low “starter” adjustable rate mortgage. That low rate will soon increase and be sure that your initial low monthly payment will increase too!
- When buying a home, do get at least a 5-year fixed mortgage, if you want a bit lower monthly payment than the 30-year fixed rate, or take a look at the new 40-year mortgage that some lenders now offer.
- If you currently have an adjustable mortgage and you can afford a bit higher monthly payment, refinance for a fixed rate.
- The key to remember is: Get a “Fixed Rate Mortgage” when possible.