Preparing For A Housing Bubble Burst
But the experts warn: some day that bubble could burst.
Greg McBride, Senior Financial Analyst at Bankrate.com, says if you're a new home owner, or in the market to buy one, you should take some defensive steps to protect yourself should home prices drop over the next few years.
"Don't borrow against your home equity, McBride advises. The equity that you have is going to be a valuable cushion and you need to build upon that equity. The way you build equity, he says, is through principal repayment of your mortgage.
This means don't just skate by on that interest-only mortgage payment or the minimum payment. You need to be knocking down some of that principal every month so you are building that cushion that will be so valuable if prices go the other way."
McBride points out that fixed rate loans - at under 6 percent APR - are a bargain right now. If you have an adjustable loan coming due, this might be the time to make a switch.
Home Equity Loans vs. Lines of Credit
Homeowners across the country are looking to cash in on the booming real estate market. That's created a surge in home equity loans. Since 2000, home-equity borrowing has doubled.
It now tops $900 billion dollars a year.
A lot of these homeowners are opting for home-equity lines of credit. Accessed with a debit card or a checkbook, homeowners can use the credit line to pay off other debts that have higher interest rates, such as credit-cards and car loans.
But you need to be cautious.
Unlike your home mortgage loan or even a normal home-equity loan, the interest rate on lines of credit changes monthly. And those rates have been climbing.
According to Bankrate.com, the average interest rate on a home-equity line of credit is 6.61 percent right now. Thats the highest rate since September 2001.
Compare that to the average 30-year fixed-rate mortgage today, which stands at 5.8 percent. And Bankrate says, This pain is nowhere near over.
One more thing to consider: home-equity lines of credit can have higher rate caps than loans. That could translate into interest rates as high as 18 percent, up there with some credit-card interest rates.
So before taking out a line of credit, be sure it won't mean spending more money in future interest payments. A home-equity loan with a fixed-interest rate might make more financial sense.
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