Even though lending practices and attitudes shifted dramatically after the housing crash, there are lessons home buyers learned from people who lost their Boulder, CO, homes to foreclosure. While not everyone who is underwater on a mortgage ends up in foreclosure, there is a high correlation. When it comes to what to ask when buying a Boulder home so you don’t go underwater, it starts with a realistic home buying budget. Also, make sure your real estate agent shows you homes appreciating in value. Someone who is “underwater” simply owes more money on their mortgage than their home is worth. Although you can’t control the value of your home or the housing market overall, it is possible to come out ahead when you know how to prevent your mortgage from going underwater. Taking out a mortgage is a financially prudent step for creating wealth. According to a recent article by slate.com, home ownership is at its lowest level in 5 decades. But it’s the wealthier taking out mortgages, while poor people take out more car loans. The National Mortgage Professionals report there are 1.2 million fewer underwater mortgages compared to last year. How do you avoid negative equity if the housing market suddenly takes a turn in the opposite direction?
Putting down 20 percent
If you put 20 percent down on your home purchase, you automatically avoid a PMI or private mortgage insurance payment. In addition, you reduce the odds of negative equity. Your home would have to go down 20 percent in value fairly rapidly in order for you to under up underwater. The 20 percent down payment gives you instant equity in your home.
Investigating the Boulder real estate market
Some people assume their home will go up in value during a booming housing market. But just because homes appreciate in the double digits in towns such as Boulder and Louisville doesn’t mean they will rapidly appreciate in your neighborhood. Research the real estate trends in the Boulder area where you want to buy. Although the past does not always predict the future, you can often see certain patterns. Talk to your real estate agent about home appreciation.
Avoiding less traditional loans
Some of the less traditional loans that often put a financial burden on home buyers include the interest-only, adjustable rate mortgages. According to a New York Times piece, interest-only loans often backfire. Some people call them “exotic mortgages.” If you absolutely know your home will appreciate in value or you will have more money in the near future, an interest-only loan is not a huge risk. For many people, it’s about putting off payments on the principal with a buy now, pay later” philosophy. Financial experts point out many people who are upside-down on a mortgage have interest-only mortgages. People who have interest-only loans are often wise to refinance to fixed mortgages. Experts suggest paying extra money to pay down the principal on interest-only loans before they reset.
According to a recent piece by quickenloans.com, Fannie Mae recently changed its guidelines for the debt-to-income ratio related to home qualification. Fannie Mae now accepts people with a debt-to-income ratio of 50 percent rather than 45 percent. Many people now qualify for mortgages even if they carry student loan debt. Experts point out it’s better to use the more lenient lending policies to qualify for a home within budget as opposed to buying a home slightly out of reach. By feeling comfortable with monthly mortgage payments, you are more likely to stay on top of your home ownership and financial goals.
Most people desperately avoid underwater mortgages because it limits their freedom and flexibility to move without having to bring money to the closing table. If possible, do what you can to prevent negative equity. Home ownership is a great financial milestone, but requires financial planning and the help of an excellent real estate agent. At Laura Guerra Real Estate, we help home buyers find the right home for their budget. For more tips, contact us.