Do you remember your high school athletic trainer? I remember mine. His name was Mr. Friend. No, seriously it was. He was a really good guy, a friend, if you will. Due to liability reasons, he couldn't really do a whole lot beyond wrap your injury, put you on the "stim machine", or tell you to ice it. Mr. Ice It is what we used to call him. Sprained ankle? Ice it. Pulled hamstring? Ice it. Frostbite? Ice it.
Did the ice actually help anything? I think so, but there were naturally some conditions that ice couldn't help. Well, ice is on its way to save the day for America, and it's coming in the form of lower interest rates. But, does America have a problem that can be solved by lower interest rates? Ehhhhh, not exactly.
Look, we all have our financial challenges, and better monthly cash flow could help anybody. Therefore, lower interest rates will help people that have great credit, plenty of equity in their home, and a good debt to income ratio. But, the people that I have just described aren't in the danger of foreclosure, generally speaking. The people that are the most in trouble, are the people with no equity (or negative equity) in their home, and can't do jack squat about it.
Here is what I mean. Let's take our old friend, Jack Squat. Jack bought his house last year for $200,000. He put (a reasonable) 10% down on the house. Therefore, as of the day he bought it he had $20,000 of equity in his home or 20%. The bank owned the other 80%. This is based on the fact that he owes $180,000 and the home was worth $200,000. Did you catch that? I said was. The home was worth $200,000. Due to the economic downturn, Jack Squat's home value has fallen 9% to $182,000. He now has $2,000 of equity in his home or 1%. The bank now owns 99% of his home's value because he still owes them approximately $180,000. This is where refinancing becomes virtually impossible. Many lending institutions are not redoing loans like these unless Jack were willing to put more money towards the loan, which he can't.
This scenario gets much stickier when you consider that many people have been putting much less than 10% down on their homes. Often times, people were putting 0% down. Zero point zero.
So, will lower interest rates help the people that are really in trouble? Nope. But it will help some people by putting them in a better cash flow position.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.