The subprime mortgage meltdown has accelerated fears of a recession. Several groups are responsible for this problem including lenders, buyers and financial institutions. The lenders and financial institutions have the financial muscle to weather such a storm, but a default can be a big setback for a home buyer. Here are some steps home buyers can take to reduce their chances of a default on their mortgage:
1. Only buy what you can afford: Don't try and buy a house based on the maximum loan amount you can qualify with the riskiest mortgage your lender can offer you. Riskier mortgages like Option ARMs offer you teaser rates i.e. lower initial interest rates that can go up substantially later. These increase the chances of default if the payment on the teaser rate mortgage is stretching you to the hilt. In this environment, the safer option is to opt for a 30 year fixed mortgage or a longer term fully amortizing adjustable rate mortgage such as a 7/1 or a 10/1 ARM.
2. If you get an exotic loan like an Option ARM or a plain fully amortizing adjustable rate mortgage, request your lender or work with online calculators to understand the change in your monthly payment when the interest rates reset. Can you afford that payment ? That's the key check.
3. Save: If you are buying a home with a mortgage other than a 30 year fixed rate mortgage, park some money aside to apply towards the loan amount when the rates reset or you refinance the loan. This way, you will have a good chance of ensuring that your monthly mortgage cash outflow remains the same.
4. Tap into your home equity only if you have to. The housing market is in a slump. Don't overspend on home improvements as they may not return you the money you spent. Go easy on the home improvements and apply the money towards a larger downpayment. It will save you more in interest costs later and lower your monthly mortgage payment.
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