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Moves to make

 

Always dreamed of being in the right place at the right time? You may be right now.

Bubble fear? Rethink your mortgage

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 continue?

"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 low?

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.

-- Posted: March 1, 2006
 
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