Most owners who lose their homes in foreclosure never thought it might happen to them. It can only happen to the people that get sick, laid off, have an accident, that kind of thing. In this article, Gary Kevin Coats of Raleigh, NC shares his thoughts on high-interest rates causing foreclosure.
So you may think Foreclosure, That won’t happen to me. No way. After peaking in 2010, the foreclosure rate has been steadily falling. The lower foreclosure rates are assisted by the government-imposed foreclosure moratorium, a mortgage forbearance program, imposed during the pandemic.
Data from real estate data analytics firm ATTOM Data Solutions revealed that lenders repossessed 2,634 U.S. properties through completed foreclosures in February 2022, which is a rise of 70% from last year (though it’s still down 45% from last month).
A few years ago, the state was been flooded with forms of financing which permit buyers to buy homes that were once unaffordable. The essential deal was this: You purchase now, pay lower payments each month, and then within five years sell at a big profit or refinance.
Truth is, it’s been a good ride. Many of us have followed the formula and made a lot of cash. But like musical chairs, you know that a bunch of people will be stuck in the wrong place at the wrong time.
Why is that a problem?
Falling prices aren’t an issue for those with fixed-rate loans, except for a lot of borrowers with the newest forms of low-ball financing, falling prices can be financially lethal.
Imagine that you just bought a property a few years ago. It made sense to buy that dream home with a $400,000 interest-only loan at 5.6 percent, a mortgage amount that covered 100 percent of the purchase price.
Everything is good for the first 5 years. Monthly payments were $1,867 plus taxes and insurance. But after five years, the loan automatically converted to a one-year ARM.
After five years not only does the rate go up, the mortgage bill now includes the expense of monthly principal payments to reduce the loan balance. The monthly cost for principal and interest? It’s now $2,943. Taxes and insurance are again extra.
“Those low-payment loans that looked so good a few years ago are going into their second phase,” says Gary Kevin Coats. “Homeowners are eager to sell at higher prices. To date in 2022, the median listing home price in Charlotte was $370K, an 8.8% increase year-over-year.”
Cashing in on high real estate prices is an option for increased monthly payments. However, the price of the next house you purchase will also be inflated.
Over the past few years, the sunbelt has seen a steady price increase. The average home price in the Raleigh metro is $391,444 in 2022, an increase of about 20% YOY, according to Zillow. Investors have been buying properties due to their economic growth potential. Charlotte has seen a 5-year annual projected household growth of 1.7% in 2022.
The real estate market has ups and downs. If you wait to sell the price may become less attractive. Not all markets have seen double-digit growth. Sacrifices need to be made in order to sell in a down market. Contributions at closing such as new carpets, new kitchens, moving allowances, etc.
But selling also may not be an option. Selling in a down market can cause increase the chances of bankruptcy. Additionally, the sale of personal property is not tax-deductible.
What can you do to avoid being a foreclosure statistic?
“Act now,” says Gary Kevin Coats of Raliegh, NC. “Don’t wait for the hammer to fall. If you see n increase in rates and unfordable payments in your future, refinance to a long-term, fixed-rate loan before your credit report shows any late or missed payments. Call your lender and see if your adjustable-rate mortgage has a conversion option. Because conversion is a loan modification and not new financing, conversion can be quick and cheap.”
It makes sense to sell now if your property cannot be refinanced and lower payments are not an option. You can move to a less-expensive home with reduced debt, lower monthly costs, and fixed-rate financing. Moving is a way to avoid foreclosure and dodge bankruptcy — two events no property owner should experience.
About Gary Kevin Coats
Gary Kevin Coats has worked in the redevelopment of underutilized properties in the Raleigh, NC area. He is the constructions operation director at Coats Custom Homes.
To learn more about Gary Kevin Coats, please visit his website.