Protect Yourself from the Real Estate Bubble - A real estate “bubble” occurs when housing prices increase at a rate much faster than the rate of inflation and median incomes. Initially, the bubble is fueled falling interest rates which make higher priced homes generally more affordable through a lower monthly payment.Don't buy more house than you can afford. Keep payments at a low level, if you have to pay more than you want take advange of loans that offer low payments for long periods of time such as interest only or pay option arms.
Real Estate Bubbles affect homeowners who depend on cashing out the equity of their properties periodically to make mortgage payments the most. With the value of their properties declining, these homeowners would have no equity left in their homes to cash out. A good way to protect against housing bubbles is to get a mortgage with affordable payments, either by way of a longer term or a lower loan amount. With an affordable monthly payment, one can easily ride out temporary declines in real estate values.
Don’t buy a house whose price seems unnaturally high just because you are afraid you will miss the chance before prices go up again.
Don’t buy a home you normally couldn’t afford just because you think it is a good investment. If prices fall you may decide the home wasn’t a good investment at all.
If housing prices fall, those who bought their homes with little or no money down may find they owe more than their home is worth, making them unable to sell. Some will have no choice but to walk away from their home, losing it to foreclosure and damaging their credit for many years.
Don’t assume your neighborhood will always continue to appreciate as quickly as it has recently. Avoid buying a home in a neighborhood that has recently appreciated well above the average a few years prior to the bubble. Ask your Mortgage Professional or a Realtor for tips on determining a “safe” rate of appreciation for your neighborhood.
The people most at risk are those with Adjustable Rate Mortgages (ARMs). As interest rates increase, so do their monthly payments. Many may find themselves unable to afford their new, higher payment.
Don’t get trapped by cash-out refinancing. Home equity should be used for home improvement. Only use cash-out refinancing to consolidate debt if you are certain you are now committed to avoiding the spending habits that accumulated the debt to start with.
Choose a modest home in a good neighborhood rather than a large, fancy home in a less desirable neighborhood. Good neighborhoods tend hold their value and appreciate better regardless of the bubble.
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