In looking at the most recent statistics among most Americans, one cannot feel frustrated about current trends. Many people are simply juggling their debt around with no thought of the consequences. Many people have decided to use their home as a bank, and when that has tapped out, they then decide to use credit cards. Then individuals have refinanced and started the process all over again.
Amidst the refinance boom, households are experiencing high levels of debt accumulation. According to a Demos analysis of the Federal Reserve’s Survey of Consumer Finances, average credit card debt among all families increased by 85 percent, from $2,768 to $5,129, between 1989 and 2004 (2004 dollars). During the same period, middle-income families—those earning between $50,000 and $99,999—had an average increase of 64 percent, to $4,667. Lower middle-income families—those earning between $25,000 and $49,999—had an average increase of 95 percent, to $ 4,831, by 2004. Among those over 65, the average credit card balance increased by 194 percent to $4,906.
Consider the cost of carrying any kind of bad debt. It is expensive all the way around including a mortgage. In most instances the home deduction is a pittance of a relief compared to the cost
Comparison of Mortgage and Credit Card Interest Payments:
Amount Annual Payment Number Total
Borrowed Interest Amount of years Interest paid
Monthly Rate
_______________________________________________________________________
Credit Cards $15,000 15.99% minimum 30 $16,597
payment =
2.5% or $10
whichever is
higher
Mortgage $15,000 5.7% $87 30 $16,341
Households cashed out $715 billion worth of home equity between 2001 and 2005. In
the three years between 2003 and 2005, owners extracted $150 million more in equity
from their homes than they did in the previous eight — a level three times higher than any other three-year period since Freddie Mac started tracking such data in 1993.
Households have used cash equity from their homes to cover living expenses and pay
down credit card debt, further eroding their homes’ cash value, which many families rely
on for economic security.
Between 1973 and 2004, homeowner’s equity actually fell—from 68.3 percent to 55
percent. In other words, Americans own less of their homes today than they did in the
1970s and early 1980s.
In 2006, the financial obligations ratio— the percentage of monthly income to the
amount needed to manage monthly debt payments —has surpassed 19 percent, a record
since data started being collected in 1980.
About $400 billion worth of adjustable-rate mortgages (ARMs), representing about 5
percent of all outstanding mortgage debt, are set to readjust this year for the first time.
Another $1 trillion in loans are set to readjust next year.
Adjustable-rate mortgages made up 31 percent of mortgages in 2005. Interest-only loans,
which were uncommon just two years ago, made up about 20 percent of loans.
In current conditions, a typical borrower with a $200,000 ARM could feasibly see their
interest rate climb from 4.5 percent to 6.5 percent, resulting in a 25 percent increase in
their monthly payment.
Rising foreclosures signal many homeowners are already buckling as interest rates rise
and home values soften, trends that will continue as more mortgages adjust. According to
RealtyTrac, foreclosures in the third quarter of 2006 were up 17 percent from the previous quarter, a 43 percent yearly increase from the third quarter of 2005.
It makes more sense than ever to avoid bad debt more than ever.
No comments yet.