In 2006, real estate was a hot area for investment in many parts of the country. Prices went up, and credit was easy. Liar loans and mortgages with adjustable rates allowed people to buy more homes than they could afford. Then, the market crashed. Foreclosures increased rapidly, and many people found themselves underwater with their loans. They owed more than their homes were worth. There is a real fear that American real estate is in another bubble. This is why it’s important to be proactive in protecting yourself from the possibility the bubble will burst.
Don’t Buy What A Bank Offers
Most realtors will want to see pre-approval for a loan that shows how much a buyer can borrow. It’s not a good idea to search for a home at the maximum loan amount. Buying a house at a lower cost will make the monthly payments easier to make.
Put Money Down
Some government programs allow people to buy a home with no money down. Others, like the FHA loan, require a mere 3.5% down. This is a dangerous loan if the market collapses. Coming to closing with a 10% or 20% down payment provides instant equity and makes it less likely that you’ll wind up underwater with your home mortgage.
Situations change unexpectedly, but those who plan to move within five years should avoid buying a home. Because most of the payments go to interest in the early years of a loan, equity will be difficult to build in the short run. Closing costs and realtor commissions can come with financial stress. Therefore, unless you plan to stick around for at least five years, renting is usually a better option.
Have An Emergency Fund
Having some money stashed away is a great stress reliever. That money can also go toward paying down a home that winds up underwater during a housing bubble. Most experts recommend having three to six months of expenses available. An emergency fund can alleviate the need to use home equity or a credit card for an unexpected expense.
Housing bubbles can lead to higher rates of foreclosure. They can also erode the wealth of many households. Taking these steps before purchasing a house can make it less likely that a family will be hurt badly if a housing bubble bursts.