People were already making the move to refinance before the Fed came in on Tuesday and cranked down interest rates.  They were acting before the White House and Congress came up with a plan to open up credit by increasing loan limits for FHA loans and enabling Freddie Mac and Fannie Mae to secure some of those same large mortgages.

Refinance applications drove the increase: Applications to line up new financing on an existing loan rose 16.9% during the week ended Jan. 18, compared with the previous week, according to the MBA’s weekly survey.

“Refinance applications are up 92% since the beginning of November and purchase applications are up 7%,” said Jay Brinkmann, the MBA’s vice president of research and economics.

Refinancing applications continue to rebound, MBA data show - MarketWatch

Now don’t start packing your Samsonite bags in preparation for a vacation to Real Estate Boom 2.0.  The amusement park rides there are still shut down for repairs for the most part as credit is still tight.  The planets are starting to align themselves however, and there is potential that we might just pull out of this thing sooner rather than much later and that at least is good news!

This morning you might hear about President Bush’s Tax Cut stimulus plan.  He is releasing a newly revised stimulus plan today that would provide $800 for individuals and $1600 for married couples.  Bush hopes that this tax cut will achieve the same results that tax cuts in 2001 achieved as they helped to stave off a recession.  Back then the checks rolled in August and people spent the checks right away, buying lots of goods to help boost the economy either out of recession or in a way that cut it off before it really began.

I for one can and will use the money, but the reason why I will use the money is the same reason why this tax cut will not help the US avoid a recession.  I am going to take that full check and drop it on one of my credit cards.  That is the area where I have a need for an expense reduction both in monthly interest charges as well as in monthly payment requirements.  I am not going to go buy a new Wii or TV or clothes or any other stuff.  The reason is that I just bought a bunch of stuff for our household last month.  It was called Christmas and many Americans are going to do the same exact thing.

January is typically the month where people buckle down to pay off their holiday debt, bills, travel expenses etc.  This is not a spending month, this is a paying off debt month.

In the long term this tax cut is actually no tax cut at all.  Its more like a 1 year wash 2nd year tax increase.  That is because the tax cuts Bush wanted to make permanent are being completely abandoned to push this deal through.  So the money that we might benefit from today, basically comes out of our own pockets next year.  The year after that we pay more as well.

Now as  a general rule of thumb, when it comes to the government I’ll take a bird in the hand any day as its rare when the government actually delivers two in the bush, even when its Bush that is the one delivering.

How to Use Bush’s New Tax Credit to Save Your House from Foreclosure

Now I am going to put this money on credit card debt.  If you are working to save your own home from foreclosure, you should consider a different option.

A couple years ago if you had been given $1600, the smart money would have been to put that money into a directbuy home improvement, boosting up your kitchen, adding a bathroom or anything that might return you a home sales price of another $10k.  This year we are looking at falling home prices and possible foreclosures.  If you have a closing that is in trouble and the buyer is asking for some extra stuff, you might use the money to save the deal.  Unfortunately, that’s not likely for most people.

Odds are that if you are trying to save your home, you are better off using this money to make another payment and negotiate a refinance deal under one of the new FHA plans that is designed to help people on the cusp of trouble that have not yet defaulted.  If that isn’t an option, you might use the money to pay closing costs on an old fashioned (non-government backed) refinance. 

If you are not in trouble, you might invest the money in the stock market.  At about 12,000 the stock market is looking like a value play.  If stocks are not your thing, you might use the money to make an extra principle payment on your home or home equity loan.  This could save you money over the life of your mortgage.

Use the money to Get Green

If you wanted to remain true to the spirit of the tax cut, you might even use say $300 to go invest some money in LED light bulbs.  Upgrade the bulbs in your house with these energy saving bulbs and you will decrease your electric bill for the long term.  You can still use the remaining money to pay down debt, or just park that money in a rainy day fund.  Heck you could even bury some of that money in the back yard!

As a financial writer, I know that there are times when it makes sense to consider a reverse mortgage as an option to help solve an issue or a problem in your finances.  If you are cash poor and house rich, meaning you have very little money in the bank or available, yet you have a great deal of equity in your house, a reverse mortgage may be something that you might want to consider.

A reverse mortgage is a tool, and as a tool it can be used to good or to bad purposes.  There are a few mortgage providers out there that probably provides safe reverse mortgage offerings.  I do not know who they are, but I’m sure there’s an honest one out there somewhere.

Do not necessarily blindly trust the latest commercial you see on TV. Anyone can put a commercial on TV, pay a subtitle service company a fee to put fancy sub titles up in Spanish even, and hire a semi-retired actor, Like Robert Wagner or James Garner(one of my favorite actors) that do not want to take out a reverse mortgage themselves to cover their snappy retirement expenses. Not all actors (that you might like) take work for ‘good’ or ‘nice’ companies. Plus, some companies that are possibly ‘good’ or ‘nice’ may have a few bad apples working for them that are working very hard in a particular month to make more in commissions and they may cut a corner right through your house on the way to their new swimming pool.

There are many more companies out there offering reverse mortgages that are dangerous and could hurt your finances significantly.

About seven years ago there was a fad and car sales, all of the major car companies started offering up their own financing to people that would buy cars.  The financing that very creative and eventually people were buying cars with major balloon payments at the end of the car, they were not buying cars when they thought they were buying cars as the financing was structured as a lease and not a loan which enabled them to get the payment they wanted, but at the end of the lease term they didn’t have the car that they wanted and the car wasn’t worth half as much as they owed!

The car cubbies were providing a service that the customers seem to want, but the financing that so creative and so complex that ultimately consumers got ripped off.  The car companies made at great deal of profits off of this, but ultimately it was like a paramedic scheme and most of the car companies suffered losses at the end of the program.  They had to shut the programs down typically taking that loss in a particular quarter.  For example they might take a loss for a half billion dollars, Mitsubishi, when they had received a great deal more profits in the years before they took that loss.  Don’t feel too sorry for the car companies.

Mortgage companies offering reverse mortgages are doing some of the same tricks that the car companies did a few years ago, and they are doing some of the same tricks that they did was sub prime loans over the last few years.  They are working the numbers behind the scenes to make them a great deal of money in fees and commissions and a number of other items that don’t necessarily help the consumer actually taking out the loan.  You mortgage broker is not your Buddy, they’re not that your friend, they’re not your business partner or your financial advisor.  A mortgage broker is a salesperson trying to sell you a house loan, treat them as a salesperson and protect yourself.  You will need to work with them whether it’s on the phone or in person, but that doesn’t mean you shouldn’t check up on their work and make sure all their numbers make sense and that goes double if not triple for reverse mortgages.

With a reverse mortgage if you have $100,000 in equity in your house, you could essentially take out a $100,000 loan on your house.  This is a home equity loan in essence and you have to pay closing costs and a number of other fees for this particular loan.  Those fees could easily and legitimately add up to anywhere from $1000-$10000 depending on who you go with.  If you go with an unscrupulous mortgage advisor, these fees could add up to $50,000 or $80,000 and at the end of the day you’ll end up with $50,000 or $20,000 in cash and the bank will own your house in a few years.

So make sure you shop around for a good deal on a reverse mortgage if this turns out to be its tool that you really need.  If you do not shop around, then you are engaging in a very dangerous behavior that could cost you your home, your finances and maybe your health.  The thing about a reverse mortgage is, it can impact your income.  This can play a role in whether or not you qualify for Medicaid or Medicare if you’re retired.  So don’t just go take out a reverse mortgage to get some cash to make your retirement easier, take a look year or entire financial situation and make sure that you’re not harming something else that could be more important than having an extra bit of cash to take a cruise or buy a car.

There is another loan crisis that is brewing rapidly on the heals of the sub prime mortgage crisis.  Like mortgages, this other loan crisis revolves around one of the biggest investments (and possibly the most important) that most people will ever make.  This new crisis is brewing in the Student Loan market.

Many of the same banks and companies that made a killing in mortgages and even fraudulently took advantage of borrowers in the sub prime market as well.  Those same banks and companies used similar tools and marketing vehicles to go after another susceptible group of borrowers, high school and college students. 

This group of people were eager and in some cases desperate to take out money in the form of a loan so that they can go to college and get a good education, or at a minimum a degree.  That sounds very familiar on many levels to borrowers that were eager to consolidate debt, or reduce their interest charges or their total monthly payments or many other things.

At least mortgage borrowers get some sort of free gift maybe even personalized pens when they sign the close documents, but Students are just getting saddled with debt and if the recession does hit, this could definitely sap the vitality out of Generations X, Y, Z and beyond.

Lower fees, easier process, less credit checks or income verification, all of those things probably mean that you are going to pay a higher interest rate on your mortgage.  Lendors are like the mob in that they always take a sure bet, and their bets can be assured when they charge you enough interest to profit!

This video is a little dated, but the concept can definitely be extrapolated even in today’s mortgage crisis world.  Just because the industry is in ‘crisis’ over sub prime, it doesn’t mean they are not going to have a profitable year.  If Las Vegas could come up with a great idea to run into ‘financial trouble’, I’m sure they would like to go to capital hill for a bail out too!

Last week I refinance some of my debt.  I’ll be upfront and honest, I have a lot of debt.  I maintain that did very well and with one exception I never miss a payment’s.

Last month I received a bill for more my credit card companies, one of my best credit cards had increased my interest rate to 20%.  That is too high.  The day after I received the bill I received an offer from the same company to perform a balance transfer from other credit cards to this 20% card at a fixed rate of 4%.  I suspect is an error by the credit card company and raising my rate so I gave them a call.

I asked them why the rated increased and it was a mistake.  After being transferred through three times, I learned that they had increased my rate due to my overall debt balance on all of my accounts.  There are many reasons why credit card companies will increase your rates, this one highlights the fact that they use your credit reports and your credit history to continually reevaluate the interest rate they should charge you.  The timeliness of your payments does not always work as the sole item contributing to the interest rate you pay.

In general they have to continually monitor how risky you are to them.  For this they use a combination of their own personal history with you and on your accounts, and external information provided by credit reporting agencies.  In my case the external information caused an increase in the rates.

So this triggered my call and that led me down the path of refinancing part of my debt.  I’ll discuss more factors about the refinancing in a future article.