Which Bill to Pay – Mmmmm?

As home values fell and unemployment rose, an increasing percentage of homeowners opted to make their credit-card payments before their mortgage payments — a trend that has been occurring for about three years, according to TransUnion, a credit reporting company.  But that may be changing.

A TransUnion study released this week found that the percentage of consumers who remained up to date on their credit cards but were delinquent on their mortgages reached as high as 7.4% in the third quarter, up from 4.3% in the first quarter of 2008. However, the percentage dropped to 7.24% in the fourth quarter, TransUnion reported. Traditionally, consumers make their mortgage payments the priority, so as not to default on their loan and possibly face foreclosure.

The reversal of the traditional payment hierarchy was driven in large part by home-value depreciation and rising unemployment, both of which speak to consumer willingness and ability to pay their mortgages versus their credit cards.  Home-value concerns and stubbornly high unemployment continue to drive this dynamic, though the decline in the number of consumers delinquent on mortgages and current on credit cards may be a sign that the divergence in the payment hierarchy has peaked.

As the job market improves and housing values stabilize, the thinking is that more consumers will revert to a traditional order when it comes to their monthly financial obligations: They’ll pay their mortgages before their credit cards. But the return to a “traditional payment hierarchy” will most likely be gradual.

Though we saw the first decline in the number of consumers who are delinquent on their mortgages and current on their credit cards in the most recent quarter, the percentage of people in this position still remains more than 72% higher than it was at the beginning of the Great Recession.

World events affect your mortgage rate

As world events dominated the news in recent weeks, mortgage rates enjoyed a reprieve from a climb that began late last year, keeping the 30-year fixed-rate mortgage down below 5% at the start of what is traditionally the home buying and selling season.

 

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