If you are a renter, you likely have a mortgage. If you’re not, you probably will soon.
The housing market is on the brink of another massive crash that could be more severe than the last one. But don’t worry, as long as you bought your home before the crisis hit in 2008, you should be just fine. Well, unless you live in California, which may be getting close to a bubble bursting moment.
In fact, if you were planning to buy condominiums (or a house) for the first time in 2012, it might make sense to wait or to do some careful research. The reason? It’s going to get very expensive very quickly.
And if you were looking at buying a condo or townhouse in any city outside San Francisco, Los Angeles, New York or Miami, you may want to take some precautionary measures.
Why are prices so high? Because banks won’t lend money to people who aren’t willing to put up collateral. And because people who can afford homes are doing the same thing. So the supply of homes has shrunk dramatically. And it seems like there are more buyers than sellers right now.
This is an issue where economists have different opinions. Some say there is no real problem; others say we’re headed toward another housing bust. Whatever happens, experts predict it’s going to be bad news for renters. In most cases, they will either have to move or pay significantly higher rents.
But if you own a home, you won’t see much change. You’ll still be able to refinance your loan, and you’ll still be able to sell your home anytime you choose.
So what does this mean for homeowners? There are two issues: Homeowners with adjustable-rate mortgages (ARMs) — and those who haven’t refinanced yet — need to start thinking about whether their rates are worth the cost. Those with fixed rate mortgages (FRMs) probably can expect to see little change.
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What About Mortgages?
There’s been a lot of talk about interest rates lately. We’ve had record low rates for the past few years, then a sudden spike just recently that made borrowing money even harder than usual. What’s causing all this volatility? Experts believe it’s tied to fears of inflation. And since rates are near historic lows, many lenders have lowered them even further in response.
But how does this affect you? If you have an ARM, you may not have to pay any more than your original rate. But you could face bigger payments down the road. As for FRMs, you probably won’t notice any change.
If you’re currently paying a 3 percent interest rate, but your new rate is 5 percent, that means you’re spending $30 per month more. If you plan on selling your house within five years, which is usually when these loans mature, you’ll need to find ways to save $150 per month. That’s a huge chunk of change.
Even if you can come up with that kind of cash, you’ll still have to spend some time figuring out what to do with it. If you’re trying to buy a new home, you’ll want to shop around for the best deal. And if you’re planning on staying in your current place, you’ll want to see how long you can stay.
If you have a conventional mortgage, you probably won’t face much trouble. However, if you’re in a high risk category, such as someone who defaults on his or her mortgage or a veteran whose monthly income falls below a certain amount, there may be restrictions on how much you can borrow.
As for condos, you may be able to buy them outright. But you may also need to consider rent versus buy. While rent is usually cheaper, if you’re renting from a landlord who isn’t flexible about moving in, or if you’re renting from a property management company, the costs can add up.
On top of that, you could end up having to pay higher property taxes. And if you’re renting from a landlord who doesn’t care about your credit score, you could be stuck paying for things like cable or insurance.
What Can I Do About This?
You have a couple options. First, you can try to renegotiate your mortgage. Many lenders give homeowners the chance to negotiate their rates for up to three months. If your lender says they can lower your payment by 0.5 percent, you could ask for more time.
You can also try shopping around for a better mortgage. A good financial planner can help you figure out what you can afford. Or you could check out a local bank or credit union. They may offer special deals on financing, especially if you already own a house.
For most people, however, the best alternative is to wait until the economy improves. If you’re planning on buying a house next year, you can still do it. But you’ll need to think carefully about your finances and think about how much you can really afford. Just remember, waiting is never easy.