If you think you're living in a real
estate bubble, add one more thing to your to-do list:
Rethink your mortgage.
"Most people assume there will be
some sort of correction," says Mike Schenk, vice
president of economics and statistics at the Credit
Union National Association. "The uncertainty is:
Will it come hard and fast, or more gently over time?"
If prices are going down, there's a good chance that
interest rates are going up. And that means that, to
the extent you can, it's a good time to trade adjustable-rate
loans for the more predictable fixed-rate variety.
The main thing, though, is to analyze your own situation.
Do you think you're sitting in the middle of a true
bubble (skyrocketing house prices followed by plummeting
values)? Or is it just that home values have been climbing
and are now leveling off or even dropping slightly?
Is the local economy healthy or troubled? Is the local
economic climate likely to change soon? And how is your
own financial situation?
Then take a look at your mortgage. Some things to consider:
Do you have one mortgage or several? How much have you
taken out under each loan, and what's the rate for each?
Under what circumstances will any of the rates increase?
If they do, what will that do to your total payments?
Can you still make the mortgage easily? What about a
year or two (or five) from now, if the rate increases
"The people who need to be the most concerned
are the people who have a lot of mortgage debt given
the realities of the rest of their financial situation,"
says Eric Tyson, author of "Mind
Over Money: Your Path to Wealth and Happiness."
Adjustable-rate and interest-only loans increase the
potential for problems, he says. "Those are the
people who are at greater risk if the market heads south."
Can you afford to change the thing that makes you less
comfortable? If you have a home equity loan or line
of credit (both of which commonly use adjustable rates),
can you afford to pay it off or step up payments and
pay it off early -- while the interest rate is still
If your entire mortgage has a variable rate, and you
don't like what that might mean for you financially
in the coming years, can you afford to refinance to
a fixed-rate loan?
And if you're already planning to refinance and you
believe a value-drop is coming, this could be the push
you need to get it done. "If the real estate values
come down, you might be in a position in the future
where you can't refinance," says Tyson. "If
your home is worth a lot, you might have more options
now than in the future."
And if you were having trouble getting into your home
in the first place and selected a mortgage that delays
paying on the principal (like an interest-only or negative
amortization loan), this is also a good time to investigate
other mortgage options.
Who's most vulnerable?
If there is a bubble, the homeowners who feel it the
most are the ones who bought last (when prices were
the highest), put the least amount down and purchased
the most expensive homes. And for anyone who limited
potential equity buildup by using a mortgage -- like
interest only or negative amortization -- the pain will
likely be even more intense.