Buyer Beware: 'Tis the Season

Boy, you’re going to think I’m the Scrooge…and this article may not apply to most of you…but I want to reach out to those of us who rely on our credit cards to help finance the holidays.  You see, years past it was not uncommon for home owners to get into the spirit and purchase many gifts for our loved ones–going over the top (meaning beyond our budget).  Yes, it feels great to see the look of joy and surprise on little Johnny and Susie’s face when the open the gifts they’ve been longing for…but this year, you may not have the “fix” of meeting with your Mortgage Professional in January to “reorganize” your debt.   Just in time for the holidays, Fannie Mae is unrolling DU Version 7.1 which really puts a damper on cash out refinances.

This officially takes place over the weekend of December 13, 2008; however lenders will start implementing this soon (so that loans are in compliance for Fannie Mae once they are purchased).   A cash out refinance will be limited to 85% of appraised value of your single family residence.   By the way, if you’re refinancing a second mortgage/home equity loan that was not used for the purchase of your residence, this is classified as a “cash out” refinance–even if you have never received cash out and you only reduced the rate on your second mortgage on a previous refinance.  (A refinance including a “non-purchase” second mortgage is treated as “cash out” with pricing and underwriting–no exceptions).   This will force more home owners to FHA mortgages which allow higher cash out refinances at a cost (upfront and monthly mortgage insurance regardless of loan to value).  

Factor in home values and you can really see the challenge with doing a cash-out refinance.  Lenders count on appraisals to establish a value for your home.  This value is based on what other homes like yours have recently sold and closed for in your neighborhood.  No sales?  A short sale?  Ugh.  It doesn’t matter what’s listed down the street, what your assessed value is or what you feel the home is worth in the lenders and appraiser’s eyes.

Tis the Season for big sales, no interest or payment for X many months and credit card companies including blank checks in our statements with dreams of sugar plum fairies and hopes that we’ll indebt ourselves further.  Please don’t do it. 

  • Make a budget for your holiday shopping.
  • Pay cash.
  • Consider a gift exchange for your family.
  • Find alternatives to spending for celebrating the Season.

You may wind up trapped, like Ardell’s Six Pack Joe, once your interest rates kick in and your bills start piling up with no refinance in sight.   I’m here to say that YOU do have a choice and you need to be informed and responsible for your debts.   Mortgages are getting tougher (especially refinances) and chances are, your home equity is not here to rescue you.

I won’t go into how credit cards and home equity loans are being frozen or the credit lines are being reduced without notice (and how damaging it is to your credit scores when your borrowed amount is above 50% of the credit card limit).  

You have less than two months to plan for Christmas.  Don’t be stuck with extra debt and tanking credit scores…your home equity may not be there to save you (even if you have it, you may not have affordable access to it).

16 thoughts on “Buyer Beware: 'Tis the Season

  1. Rhonda:

    Good message. Living off the growing equity of your home is not going to be an option anytime soon.

    Here’s two ideas to consider.

    1. Last Christmas, I was stressed out by the pressure to buy more junk. We really don’t need more stuff, but still, there’s the obligation to buy presents, for folks that really don’t need more stuff.

    Instead, really study what the person you want to give to cares about, and make a difference by making a truly personal contribution in their name, and write about it.
    Don’t take the easy way out, and write a check to the Humane Society, but actually find a person in need, and meet their needs. Present your charitable contribution, along with pictures, descriptions, etc., to make it very personal.

    2. Make a rule that NO gifts can be new merchandise. Go to thrift stores, barter, make trades, make stuff, etc.

    Of course, this is going to make China pretty mad, but honestly, do we need the stuff? Let the Chinese buy it for a while.

    When their number one growth industry is Public Storage units, we’ll know they have enough.

  2. Thanks, Roger.

    This post really came together for me because of worrying about my family and our gift giving. For years I have tried to encourage our family to do a gift exchange…my hubby’s family does this and it’s fun. No one feels like they’re missing out (not even the kids). I’m hoping I can convince my family that this may be the year to start this….wish me luck!

    You know, just as I do, that we have people contact us after the holidays because of their “debt hangover”. It’s going to be more challenging (if even possible) to cure it now.

  3. It’s been about two years since I found this site. It’s amazing how quickly the gap between reality and perceptions has closed in that time.

  4. Shane, with regards to this post, I’ve alway’s felt this way this time of year…knowing that many folks are out spending their budgets and will sheepishly be calling after the holidays for help.

    The next big drop in our economy is going to be when credit cards are capped. Consumers who are used to relying on credit are going to be hurting big time as credit lines are reduced and interest rates jacked.

  5. Damn, the views expressed in this thread are very close to being anti-American! Spending and charging are good! 😉 😀

    Rhonda, I think there will be a lot of people in trouble even if credit card availability doesn’t change. There is a good percentage of the population that runs up credit and then refinances their house to pay off the credit. That no longer works.

  6. Hi Rhonda, as usual, I think you’ve made a timely and excellent post. My family has done a gift exchange with a modest price tag limit since I was a young kid. The price has gone up some, but not by much. It helps to get creative sometimes and I like that we don’t all feel like we’ve got to buy, buy, buy for everyone. The personal nature of some of these gifts far outweighs anything else and I frankly don’t want to fill my house up with “stuff” that I don’t need or want.

    I’ve found that donations are an excellent way to “give” and making personal gifts like favorite foods is fun and a renewable gift that you can give over and over and it never goes out of style.

  7. Thanks, Reba. Much to my relief, my family has agreed to do a gift exchange. Wish me luck because years past, I almost negotiated a family gift exchange only to have it fall apart a few weeks before Christmas because a few did not want to participate.

    I was hoping to find the website I used back then that helped organize and draw the gift exchange…it was actually pretty cool!

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