The global financial crisis of 2008 was triggered by the irresponsible interbank trading of profitable mortgage-backed securities, which increased the demand for more home loans within the banking sector. To satiate the need for more mortgages, lenders made it easier for American borrowers to get their loan applications approved.
Qualifying for a meager mortgage rate in Utah and other parts of the country was a walk in the park during this time. In consequence, the demand for housing increased and home prices skyrocketed.
Lots of mortgages went underwater (when the loan balance becomes higher than the property’s worth) after home prices began to drop to more realistic levels. Since many Americans bought a house (or several pieces of real estate in some cases) they could not afford in the first place, foreclosure filings in the United States increased by over 81% in 2008, which was 225% more than those recorded two years prior.
The fear of losing your house to foreclosure in case of another housing bubble in the United States bursts should not discourage you from pursuing homeownership. You can keep a roof above your head if you do the following:
Choose a Short Loan Term
Financial experts say that you can’t afford to buy a house if you can’t qualify for a 15-year mortgage, and they have a good point. A loan with a short term entails a high monthly rate, but the rewards of taking it out are extreme. It allows you to reduce the principal balance of your mortgage fast, which in turn builds home equity more quickly.
Put Down a Large Down Payment
If you can’t handle the burden of paying for a high monthly mortgage payment, you should put down a lot of money up front at least. A significant down payment allows you to build a lot of home equity before you even move in.
Sure, a fat down payment might lower your rate of return when your property appreciates, but it makes you less vulnerable financially in the event home prices decline sharply in your area.
Make Extra Payments
Paying more than what is required is an effective way to cut down your loan’s principal rapidly. During the first half of a mortgage term, most of the monthly payments go toward the interest. In other words, the principal does not decrease as quickly as the interest.
If your lender allows you to make extra payments, capitalize on the privilege. Some lenders penalize surplus payments, so find out whether prepayment is even your option before you sign on the dotted line.
Leave Home Equity Untouched
A cash-out refinance turns a house into an ATM by tapping the equity built on it, but think long and hard about the consequences before applying for it. You might get instant funds usable for whatever purpose by refinancing your mortgage with a cash-out feature, but it increases your home loan’s risk of going under water.
Nobody forms housing bubbles intentionally, but they tend to happen because of the greed and recklessness of lenders, investors, and borrowers. You can’t stop one from bursting, but you can build as much home equity as possible to have a financial cushion against sharp property price drops if and when the housing market collapses again.