By James J. Saccacio, RealtyTrac Chief Executive Officer Rapid real estate appreciation and record-low interest rates in recent years have driven the national foreclosure rate below its historic averages, but many homeowners are more susceptible than ever to falling into foreclosure if there’s a slight downturn in the economic climate.
"The chance of a significant increase of mortgage defaults is definitely on the rise in the U.S.," said T.J. Marrs, a national real estate author, speaker and success coach. "The basic problem is that many people have chosen to obtain mortgages which have built-in negative amortization. This means that their balances will actually be increasing rather than decreasing with their monthly payments. Additionally, these mortgages will have an automatically increasing payment over a period of time."
It’s still financially wise to own a home if at all possible. Real estate has historically always appreciated in value over the long term, and current low interest rates offer an excellent opportunity to jump into the market. However, as with all investments, it’s important for homeowners and future homeowners to be aware of the potential risks involved and take the necessary steps to mitigate those risks.
Below are some practical ways you can safeguard your home from foreclosure, even if the economy nosedives.
Live by a budget
A budget creates a structure that prioritizes your monthly income so that you spend your money on what is most important. It protects you from frittering away your cash on whims and ending up short on the items that are critical, like your monthly mortgage payment.
"Very few people manage themselves carefully enough to use an actual budget," Marrs said. "As every dollar slips through a consumer’s fingers each month, much of this money is wasted. Many Americans fall into the category of having too much month at the end of the money."
When qualifying you for a loan, your lender presumably evaluates your monthly income to ensure you have enough to live by and still cover the additional housing expenses, namely a monthly mortgage payment, property taxes and homeowner’s insurance. But don’t leave it up to them. Before you buy a house, carefully and honestly determine whether your budget can absorb those additional expenses.
Leave a margin for bad times
Financial planners typically recommend a six-month savings cushion, meaning you should be able to continue to make all your financial commitments for six months if your income is completely cut off. That’s a great rule of thumb, but many people find it tough to get there because their monthly income is already stretched to the limit.
Still, if you want to drastically lower the risk of ever defaulting on your mortgage payments or losing your home to foreclosure, it’s critical that you build some savings into your budget. Even if it’s just a few dollars a month, be disciplined about setting aside cash for that rainy-day fund. If you end up saving enough for six months, funnel those monthly savings toward paying down extra principal on your mortgage (assuming your mortgage does not have a pre-payment penalty).
If the tough times hit, and your monthly income doesn’t cover your mortgage payments, don’t hesitate to use your savings to buy some time. That’s what the money is there for – it’s better burn those savings than to incur debt or default on your housing payment. Of course, you’ll need to anticipate when those savings will run out and decide if you can make the adjustments needed to continue living in your house. If not, you may need to jettison the cost of owning a home.
Buy within your means
When you’re borrowing hundreds of thousands of dollars to purchase property, you need to make sure the financial numbers add up before you move forward. For example, a homebuyer using an interest-only loan or negative amortization loan is making the assumption that the home will appreciate in value fast enough to offset the amount paid in interest (plus the additional principal if it’s a negative amortization loan).
This gamble may pay off in some super-hot markets with little potential for cooling, but you need to look long and hard at the market conditions before you go out on a limb. If the financial basis for buying a house is shaky, you need to be willing to wait until you’re in a better situation to buy or look for a less expensive house.
"Today, most people are buying too much house, just because they could qualify for the loan," Marrs said. “I see desperation buying going on all over the country. People are buying for all sorts of the wrong reasons, just because they want to be in the market."
Crunch the numbers with RealtyTrac’s free loan calculators.
Shop for the best financing (or refinancing) options
Just because you need to be cautious about home financing doesn’t mean you shouldn’t shrewdly shop around for the best loan options available. In fact, the competition that’s been created from the recent housing boom has given many potential homebuyers a better chance of finding home financing without sacrificing financial stability.
Investigate the advantages and drawbacks of your different options: adjustable vs. fixed rate; the length of term; whether you should pay points to lower your interest rates; and the myriad other options available to today’s homebuyers.
Current homeowners should keep a watchful eye on interest rates and consider refinancing if interest rates drop. Even if you’re comfortable with your current monthly payment, it never hurts to save money. If you ever get in a tight spot, you’ll be grateful that your payments are lower, and you can always apply the amount saved toward paying down extra principal.
Get Financing Options from RealtyTrac’s national network of lenders.
The best antidote to foreclosure is promptly paid monthly mortgage payments. The guidelines above should help you avoid the possibility of ever defaulting on your payments.
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