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Tuesday, August 21, 2018

No More Spending Willy Nilly

If you are someone who carries a lot of debt; if you are comfortable on the riskier side of the financial spectrum; if you like leverage; or, if you have been planning to just pay down that debt at some future date, now might be that time.
There are several factors that have begun or could soon begin to make carrying debt much more expensive. The first and most obvious factor is rising interest rates. With both long-term and short-term rates up significantly over the past year, it is more expensive to borrow. That means that same amount of household income can buy less then it did just one year ago. It also means that the standard “bailout” of paying off consumer debt with a home equity line has become much more expensive for millions of Americans.
Another factor that could add to that expense is the talk that is currently going on in Washington about restricting the amount of mortgage interest that you can write off on our taxes. If that amount is reduced, it has the immediate net affect of making debt more expensive.
Thirdly, this month (January 2006) banks are being required to increase the amount of your minimum payments on credit cards so that you are forced to pay down your debt more rapidly. For many, this could mean credit card payments almost doubling. This will actually be a good thing in the long run because it may slow the amount of credit card use for many people, and, of course, it will force many to reduce their debt. In the short run, however, it could be quite a burden on many family budgets across the nation.
And finally, in case you were thinking about using a “low payment option” Adjustable Rate Mortgage (with Negative Amortization) as your loophole (or your back-up plan), to keep your payments low, the powers that be are talking about restricting these loans or eliminating them all together.
Personally, I think some (not all) of these cutbacks and restrictions are good for the nation and good for people in general … but that doesn’t mean its not going to sting a little bit. The long and the short of it is that you many want to carefully consider purchases before going into debt.
I believe that a lot of these changes are designed to curb speculative investors from leveraging themselves to the hilt to buy more and more property. Why would the government want to curb frenzied speculation, you may ask?  Think “1986 S&L crisis” where regulations were sparse and lenient, money was cheap and anybody with a nickel was trying to speculate on land and trying to turn it into a dollar. It drove land prices higher than the market could sustain and there was a huge correction. Also, think “1999 Stock Market crash”; over-speculation leads to inflated prices, which are usually followed by a crash. I believe they are trying to curb the speculation to avoid the crash. I think it is the right move. Get ready.

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