It’s impossible to prevent or solve a problem when the cause is unknown. Imagine a ship taking on water, but being unable to identify the leak. Part two of our How to Save a House series focuses on avoidance by exploring the biggest causes of home foreclosure.
In our first article, we discussed facts about foreclosure, but awareness of the factors can provide warning indicators. Here are the top five reasons people fall into foreclosure.
1. Negative Equity
Equity is the difference between the value of a property and what is owed on the mortgage. Riley buys a house for $100,00 and over time, pays $30,000 toward the mortgage. As long as the house is still valued at $100,000, Riley has 30% equity in the property.
Let’s say that market conditions cause the value of Riley’s house to drop to $60,000. In this case, there’s still going to be a $70,000 balance on the loan. Riley now has negative equity in the home and is “underwater” on the mortgage. Negative equity isn’t a direct reason of foreclosure, but it restricts the options to need to sell or refinance.
2. Rising Interest Rates
When it comes to mortgage structure, interest is either fixed or variable. As the name implies, fixed interest rate loans have the same rate throughout the life of the loan. Adjustable rate mortgages start with a fixed rate for an introductory term and then change on a yearly or even monthly basis.
Let’s refer back to our $100,000 property. With a 30 year fixed rate mortgage at 5%, your monthly payment is $537. With an ARM, a rate at 3% paying $422 per month. Once the adjustment comes into effect your rate could jump to 8% and you’ll wind up kicking out $734 monthly. Clearly this shock in mortgage payment will destabilize a budget if it’s not anticipated.
3. Mounting Medical Bills
Anyone who has ever paid a medical bill knows one thing – they’re expensive. According to the census, 19% of US households couldn’t afford to pay medical debt right away and carry debt that’s higher than 20% of the annual income.
When it comes to credit card debt, Americans have a total debt of a whopping $800 billion, with the average American carrying just over $4500 in debt. With the average interest rate at 18%, so many homeowners are paying through the nose on balances they’re carrying from month-to-month.
This cause of foreclosure needs no explanation. Unexpected job loss has a major impact on homeowner finances. When income isn’t coming in, it’s a matter of time before expenses are impacted. When homeowners aren’t able to pay their mortgages, they often spend time being stressed and looking for work. Unfortunately, these same homeowners often don’t inform their lenders and wind up in default.
Of all the causes of home foreclosure, Divorce can be the most difficult. We all know the statistic: 40-50% of marriages end in divorce. There are deep emotional waters to navigate during a divorce. When it comes to homeownership, what happens when one spouse refuses to make house payments? Or if spousal support isn’t provided, and one person is forced to pay all of the housing bills? The divorce process can be messy, and a mortgage or financial obligation can sometimes be put on the back burner, causing deep financial distress.
6. Illness or Death
Aside from medical bills, injury or illness can prevent you from being able to work. Many homeowners who have high-paying jobs, then encounter life-changing accidents or illness that drastically impacts their ability to make money and keep up with mortgage payments. The financial burden of illness can ultimately lead to an inability to pay the loan and eventually foreclosure.
In the instance of an owner’s death, a family member may inherit the property, as well as the debts and liens against it. Death doesn’t automatically terminate a mortgage, but if no one steps in to take over the payments, a bank or lending institution will foreclose.
Though we’ve covered 5 reasons that people find themselves facing foreclosure, there are plenty of others like job loss, budget mismanagement, and even drug addiction. Foreclosure can happen for a number of reasons, but once you’re there it’s important to face the reality of your situation and take action based on the options available to you.
For more information on the causes of home foreclosure, head to www.bluetowersfg.com or email us at email@example.com!
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