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.

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.

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.

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.

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.

Lets find out with a simple example. A new car with a sticker price of $27,000. First, lets look at buying. Financing the entire $27,000 at 6.9% interest and you’re payments will be about $821 a month. Times that by 36 months and you’ll pay a total of about $29,556. But after 3 years, you still have a car worth $14,556, so your actual cost is $15,500.

Now look at a typical lease. You put a $1000 down and your total might be $485 a month on a 3 year lease. Times that by 36 months and you’ve paid out $18,460. This is about $3000 more than buying. Now even if you earn interest on the money you’re saving on those lower monthly lease payments, buying is still going to win. The longer you keep you car, the more sense buying usually makes. Using 5 years instead of 3 for example, you still come out ahead even more.

Bottom line, while there are factors that could make a lease a better deal, generally you’ll keep a little more money in your pocket buy buying rather than leasing.

Now since there are differences in both cars and deals, you really need to do the math yourself. But don’t worry if the numbers make your eyes glaze over. There are tons of free calculators online that will help you decide.

The hedge funds and the investment asset crews that have hundreds of millions of dollars are ready to pounce on these distressed property opportunities. They sense the blood in the water and its coming. So the big money, the real estate vultures, are ready to profit. But what about small investors. Could they make money by buying low now and selling high later?

Theres going to be some tremendous opportunities, not just as an investor, but also as a home owner to pick up a property that maybe you wouldn’t have been able to touch a couple of years ago. You may still want to wait however, the bottom of the real estate market hasn’t hit yet and maybe still a year or two away. Vulture investing doesn’t have to pad the pockets of just the big money as long as you can watch and time the market right.

This not only has an effect on the business person themselves, but filters through out the entire economy as less businesses being started and expanding. As a result, there are less jobs, which means there are less people getting pay checks and people are spending less money.

The reverse of this is also true. When interest rates fall, business take advantage of access to cheaper and borrowed money, the stock market reacts accordingly.

In addition to interest rates affecting the stock market, interest rates also have a direct affect on the bond, foreign exchange and futures markets. For example, when interest rates rise when looking at the bond market, the value of existing bonds fall as investors can now purchase the same bond with a higher interest rate. In the foreign exchange market, when interest rates rise, it becomes more attractive from a yields standpoint to own the dollar against other currencies or to invest in interest bearing dollar-based assets. This normally creates a demand for dollars which many times cause the dollar to strengthen. The reverse is also true when interest rates fall.

In the commodities market, when economies grow at a greater rate as a result of lower interest rates, this normally means greater demand for commodities, so their value will tend to go up.

Now that we understand the importance of interest rates to economic growth and therefore the markets in our own trading, the next thing to understand is how this relates to the government role in the economy. The government has two options when trying to influence the business cycle to keep prices stable and work towards full employment. The first is fiscal policy or exerting control over government spending and taxation to try and influence the business cycle. The second and perhaps the most important to us as traders is monetary policy which is exerting control over the money supply which has a direct relationship with interest rates also with the goal of influencing the business cycle.

With this in mind, the federal reserve is the institution responsible for administering monetary policy and therefore can increase or decrease the money supply with the goal of trying to affect the level of interest rates.

As the level of the interest rates has such a large effect on everything in the economy from unemployment to inflation, this makes the fed one of or the most power institution in the U.S. Why is this important to know as traders?

Because the Federal Reserve can enact monetary policy without government approval. This gives the fed much more control over the economy, at least in the short term and is the reason some people consider the chairman over the federal reserve to be more powerful than the president. The primary components which move markets are the board of governors and the Federal Open Market Committee. Theres no greater mover in markets than changes in peoples anticipation of interest rates.

Jeb was asked why he thinks this bill would be a “Bill of Wrongs” and his reason was that this could lead to increased fees, annual fees and take away some of the credit card benefits. Jeb argues also that by limiting the interest rate terms a credit card company can give is prohibiting the ability of people with good credit records from paying less from those who don’t.

Ten years ago, a third fewer Americans had access to credit cards, they all had to pay annual fees and paid a high interest rate. What’s changed now is these credit card companies are in a competitive marketplace and can now offer some people with good credit records with lower rates. What Congress is essentially doing, according to congressman Jeb is take away the credit card company’s ability to price for risk.

There is however a problem with credit card companies engaging in unscrupulous practices using a bait and switch technique on introductory interest rates and high penalty fees. Often the disclosure with credit card companies is difficult to understand. At some point, it seems to some that this essentially becomes loan sharking and predatory lending.

We had usery laws at one point which prohibited companies from charging interest on top of interest. That has been done away with at the request of the 3 billion a year from lobbyists. These same lobbyists helped write the new bankruptcy laws of 2005 that makes it harder for Americans to file for bankruptcy. The top ten Credit card companies currently compose a 135 billion dollar industry.

Many proponents to this bill ask for better disclosure. No one fully understands their credit card terms and there should be more regulation here. But it doesn’t stop there. They still need to limit fees.

less than 6 percent of these default notices will become actual foreclosures as most homeowners will make up their payments and late fees. On April 24th, Countrywide Financial CEO Angelo Mozillo says he expects the mortgage market to improve in 2008 and be “very healthy” in 2009. He said that 5% of the nations riskiest sub prime loans may face foreclosure and that the rest will no go into foreclosure.

Currently, there are more homeowners than at any other time in the united states. Much of this is due to sub prime or exotic loan markets. Although foreclosures are at an all-time high, so is home ownership.

It is almost impossible for someone to rent in todays real estate market and save tens of thousands for a down payment and closing costs. It is an unrealistic reality for most people trying to live the American dream.

Many homeowners today got their opportunity today through the sub prime loan programs and more than 90% will make good on their dream of long term home ownership.

Looking at sub prime mortgage companies that have gone bankrupt or are severely damaged by the market change, we need to keep in mind that we live in a free market society and that these companies chose to lend at higher rates to these people.

The investors in these assets chose the risk to receive the higher return. It just didn’t work out for them.