Are Responsible Home Owners with Great Credit Being Cheated?
Consider the following Scenario:
The Bigheads live next door to the Frugals. They’ve been friends for many years and purchased their identical homes at the same price, next to each other in 2006. They even used the same bank to finance their purchases at 7.2% interest and a 30 year fixed-rate. Not surprisingly, they both have the same mortgage amount of $300,000.00, and each family has really cut back on discretionary spending to stay current on their mortgages.
Having heard so much about the novel programs the banks are offering to distressed homeowners, the Bigheads and Frugals decided to contact their lender together. They were told by the bank there was nothing the bank could do unless they were behind in their payments. They were current on all their payments, so they didn’t qualify for loan modifications. They were also told they couldn’t refinance unless they came to closing with $100,000.00 because they owed much more than their homes were worth.
Wow! Talk about frustrated, not only were they paying too much monthly, it was going to be years before they would be at a break-even on their homes.
Here’s what happened next:
The Bigheads bit the bullet, continued to cut back on their lifestyle, and continued to pay the bank every month. They had worked for many years building up their credit score to 840. Under no circumstances would they allow their credit to be ruined.
They continued to pay $2,349.00 monthly in principal and interest to the bank on their 7.2% fixed rate loan. Over the next 10 years, they paid a total of $281,880.00.
No surprisingly, the Frugals, took a different route. They decided to meet the bank’s requirement of getting behind on payments and suffer the consequences of delinquent credit. They reasoned that once the loan was modified, they could recover their excellent credit rating by staying perfect on their payments, as they had always done. The bank did in fact, renegotiate their monthly principal and interest
payment down to 3% interest. The Frugals dropped their principal and interest payments from $2,349.00 per month, all the way down to $1,609.00 per month. Over the next 10 years, they paid the bank a total of $193,080.00.
Over the next 10 years, the Frugals paid $88,800.00 less to the bank than the Bigheads did, by intentionally falling behind on their mortgage payments and by temporarily allowing their credit score to drop. Here’s the kicker, they didn’t spend the money, they still gave the bank the extra money, but had it applied to the principal on the loan. After 15 years, their mortgage was paid for!
The Tough Question
Did the Frugals act reasonably, while the Bigheads focused too heavily on how impressed they were with their credit score? Or, did the Bigheads do the honorable thing by living up to their contractual obligations, while the Frugals fudged?
Are the 88% of all borrowers that are making their mortgage payments to the bank on time at a higher interest rate, being cheated?