Debt is a Fact of Life in America

Debt is a Fact of Life in AmericaThe average American household has $9,300 of credit card debt, but the share of income going to lower credit card debt has fallen to 0.3 percent.

The increase in personal debt can’t all be blamed on overspending. After adjusting for inflation, wages have been flat for the past five years while the cost of essential goods and services like housing, food, medical care and transportation have risen over 11 percent according to the Federal Reserve Board’s most recent Survey of Consumer Finances.

Housing Debt

Based on this study, the Washington Post recently reported that,

The debt of the typical American family earning about $45,000 a year rose 33.1 percent from 20011 to 2015, after adjusting for inflation … Housing debt has climbed notably because home prices have risen and people have borrowed against the equity in their homes. From 1999 to 2015, for example, the median mortgage debt more than doubled, from $46,900 to $96,000.

This refinancing trend is one of the main strategies for debt relief. It takes several forms: first mortgage refinancing, second mortgages, debt consolidation loans and home equity lines of credit. These mortgages can be either fixed-interest or adjustable-interest loans.

Many websites keep abreast of current interest rates and offer a free mortgage refinancing application that matches potential borrowers with the best loans based on factors like credit history, FICO score, type of mortgage and size of loan.

Debt Consolidation Loan

A debt consolidation loan converts a passive asset—home equity—into ready cash for debt relief. It is easier to get than other forms of borrowing because the loan is secured by tangible property. It makes better sense than borrowing against the cash value of a life insurance policy or pulling money out of a retirement or 401(k) account.

New or refinanced mortgages don’t really reduce debt, but they can restructure it in beneficial ways. Benefits include: being able to pay off high-interest credit cards and other forms of revolving debt; making home improvements that increase the market value of the house; having a single monthly payment at a lower rate of interest. An added plus is that the interest on a home loan or mortgage is usually tax deductible.

But don’t wait too long to refinance. CNNMoney.com reports that, “Real estate gains came to an abrupt halt in the first quarter of 2016, with the median price of a U.S. home falling 3.3 percent from the fourth quarter of 2015. … Prices were basically flat or lower during the quarter as inventories of houses for sale rose and their time spent on the market lengthened, according to a survey of 149 markets by the National Association of Realtors.”

Even if the Feds keep raising interest rates, mortgage refinancing and home equity loans will still be the preferred form of debt relief for homeowners who find themselves in a financial pinch. At a time when the national savings rate is below zero, home equity is the only asset many people have.

Credit Card Debt

Credit Card DebtToo often these days borrowers find themselves the victims of a money management system that simply does not work. The current magic bullet to get the average consumer is a mortgage loan that pays off one debt while allowing the overspending and debt building use of the credit card. Face it. We are a borrowing nation and we are in trouble. The current plague is known as the interest only mortgage.

Loan companies continue to extend credit that reaches well beyond acceptable debt-to-income ratios – a dangerous practice to be sure. The average consumer owing more than ever as they find themselves slowly being buried beneath ever-increasing credit card debt. It starts early on. Recruiters lining the halls of campus buildings, handing out applications for major credit cards, promising credit to young, naive college students. Other consumers, not in college, but still a part of the overly zealous spending public, also continue to flash their plastic as they buy their way further into debt. What is their ultimate plan for managing credit card debt? They will use an interest only mortgage to pay off the credit card debt that they continue to accrue but can’t really afford, ending up with credit card debt that isn’t really going down and a mortgage loan that continues to go up. As I said, a money management system that is doomed.

The upside to the interest only mortgage is the way that it takes a non-deductible burgeoning debt and turns it into a tax deductible burgeoning debt. Cool, huh? Not really. If you are spending more than you can afford, the interest only mortgage makes no sense to anyone but the mortgage company. They really don’t want you to cut back your spending and manage your assets wisely. After all, such a competent financial decision on your part would mean less income on their part.

Instead of taking the lemming approach of using mortgage companies that advertise their services of providing interest only mortgages in order to allow consumers with bad credit records to pay off their outstanding credit card debt, consumers should instead be encouraged to consider how they spend their income. Learning to not overspend would solve the problems both now and in the future, where the interest only mortgage offers no long term solutions on any level to any consumer. It’s simply a bad deal.

Sure, it is risky to finance consumers with bad credit. But a mortgage indicates that there is a piece of good, solid collateral here. Risking a solid viable asset for an interest only loan is the classic text-book example of poor judgment. Incurring a mortgage debt at any time is something that should be carefully considered and if the consumer doesn’t have a clear understanding of the concepts surrounding mortgages and interests, they can decisions that will affect them negatively for years to come – especially in the financial realm. Unfortunately, most of those affected by decisions like interest only mortgages are already in the bad risk/bad credit/bad decision making history and so they feel cornered, without anywhere to turn.

It is completely mind boggling that with all the layers of regulations and statistics that are flashed to the public and published concerning good and bad credit ratings that the notion of an interest only loan is even legal. Where are the leaders who are supposed to predict and protect the lending industry? Certainly not paying attention to this concept, that is for sure! Maybe Alan Greenspan dozed off during the introduction of this particular mortgage loan option, but one thing is for sure – someone should wake him before the mortgage brokers find another brilliant idea to bring consumer debt to an even higher all-time high.