Everybody wants to know what a short sale is and there seems to be some confusion on the subject. I asked a few folks what a short sale is and I got varied. Lets explain what this really is.

You bought a house, a commercial property, an investment property, or maybe even a piece of land. Your borrowed money to buy the piece of property and took out a mortgage. Now the real estate market crashed. Insurance went up, taxes went up. You may have lost your renters, your job, and for whatever reason you can’t afford to make the monthly payments.

Now the property is worth less than you owe the bank. A short sale is when you ask the bank to accept less, allow you to sell your property and still discharge the mortgage and let you off the hook for the remaining balance. If the lender agrees to it, thats a short sale.

people do it all the time. We’ve been doing it since time began. If I lend you $100 dollars and you don’t pay me back for 6 months but show up on my doorstep and offer me $80 and tell me thats all you have. Am I going to take it? Of course I am. I know if I don’t take that $80, I’m never going to get my money back.

And this is precisely the position a lot of these lenders are in right now with mortgages. This is the toughest real estate market in the history of modern mortgage lending. Foreclosure rate is at an all time high and the lenders don’t know what to do. The bank knows they might only recover 40 or 50 cents on the dollar if the property goes into foreclosure. No one is buying foreclosures on the courthouse steps. They’re going to hold the property, pay the taxes and insurance and maintenance for how long?

Make them a short sale offer. Even though its more than you owe, its still might be a great deal for the bank and they might be willing to do it. So, don’t give up, try a short sale if you’re upside down on your property with no way out.

when you own a home, you’re building equity. And a lot of people use that equity as collateral to borrow money, especially when they’re borrowing to make a big purchase like a car or a vacation. Home equity loans are for tax deductible interest, lower rates and longer pay back, so they can be a smart idea.

But the first thing you need to think about when you’re drawing up that borrowing plan is which type of equity loan you’re looking for - a regular loan or a line of credit. Whats the difference? Well a home equity loan is really just a second mortgage and it acts like a first mortgage. In other words, you lock in an interest rate, you’re payments are fixed, and so is the amount of time you have to pay the loan back.

A line of credit though is more like a credit card. The interest rate can fluctuate, you can draw on it or not at your whim, and the payments and rate of the loan will change accordingly.

So which should you use? Well now that you know the difference, make the loan fit the purpose. In other words, if you’re borrowing for a non-recurring expense like a home addition, use a fixed loan like a home equity loan. But if you’re going to be taking out a little here and paying it back and taking out a little there, like for school expenses, a line of credit may make more sense.

But here’s a warning. In some parts of the country where prices are falling, lenders have already canceled already approved lines of credit. So if the bubble has burst in your neighborhood, keep that in mind.

What is mortgage cycling? To put it simply, its just a way to use the existing equity in your house to pay down your mortgage faster. The concept is based on the fact that when you take out your mortgage, the payments are initially interest heavy and you use the home equity to pay directly towards principal so that you can pay down the mortgage quicker.

The best way mortgage cycling works is to use a Home Equity Line of Credit or HELOC, because being that its a line of credit, you can access this repeatedly. You take the portion of equity from the home equity loan and apply that towards the first mortgage. By doing so, you’re paying your principal faster and thus pay the mortgage balance quicker.

You also have to make sure you can pay off the home equity line of credit every 6 to 12 months so you can start the process over again, thus the term ‘mortgage cycling’.

A common question asked is are there any risks to mortgage cycling. And there are some risks. The main thing you have to pay attention to is that you have to be disciplined in order to make this work. You have to be able to pay of that home equity line of credit in a very timely fashion so you can quickly take out another HELOC loan. You have to be committed to this strategy for the long term.

But if you know that you’re not going to spend that money on a car or boat, then you can really get your mortgage paid down much quicker. The temptation is always going to be there to use those funds to do other things.

So, if you can play with the equity in your house responsibly, then instead of risking a default and possibly foreclosure, you could have your mortgage paid off in as little as 10 years.

since the fed is on a rate cutting binge, many mortgage applicants have been calling their mortgage representative and expecting a lower interest rate. In fact, many mortgage brokers advertise when the fed cut rates expecting consumers reaction to think that this means mortgage rates are following suit. Others waiting to refinance are puzzled why mortgage rates have not moved lower in the recent rate cuts.

This can be difficult for consumers to understand after watching a 2 1/4 reduction by the fed and seeing very little benefit with mortgage rates. So the question becomes, is a fed rate cut good news for mortgages?

The facts may surprise you. The fed only controls the discount rate and the fed funds rate. This is very different from mortgage rates. A mortgage rate can be in effect for 30 years when the rates set by the fed can really change from day to day. There really isn’t any real relationship between the fed rate and mortgage rate.

In 2001, the fed cut the rates 11 times which resulted in 4.75% reduction in short term interest rates. That took the fed funds rate from 6% down to 1.75%. Mortgage rates actually moved higher during this time. Why, because inflation, the arch enemy of bonds, actually rose.

You’ll notice longer term interest rates, like those on a fixed 30 year home loan, always tend to be higher than short term rates. This is due to the inflation premiums and liquidity factors connected to longer term securities. The trends show that when the fed cuts rates, the impact on mortgage bonds interest rate moves in the opposite direction.

If our homes are our castles, then our mortgages are the dungeons, because they lock us into debt. Best way to escape, paying extra principal every month. Say you have a $170,000, 6% / 30 year mortgage. Make your normal $1020 monthly payment and you’ll pay it off in 30 years and $197,000 in interest payments.

But suppose you pay $2000 a month instead of $1000. You’ll be free in 9 years instead of 30 and you’ll pay only $52,000 in interest, thus saving yourself $145,000.

So paying down a mortgage is certainly smart, but is investing it smarter? To find out, compare paying on your mortgage with what you could earn elsewhere. Mortgage interest is often deductible. If you’re in the 25% bracket and you deduct your interest, after tax you’re only out of pocket 4.5%. And stocks have historically done twice that much over time. And put that money in a 401 or IRA and you’ll bypass taxes too.

Bottom line, the numbers say if you have extra money, you’re probably better off investing it rather than paying down the mortgage. But thats just the numbers. Paying off your mortgage might also buy you peace of mind, something that investing in stocks might not do. And thats particularly true as you reach retirement age. So you really need to thing this one all the way through then decide.