Here's How Your Mortgage Will be Affected if the Debt Crisis Worsens
Potential Problems in the Future
If the debt crisis spirals out of control, you can expect several things to happen.
1. Real estate values will once again drop: As if home prices are not already low enough, a worsening debt crisis could lead to yet more drops in value. If you have no plans of selling in the near future this may not affect you badly. However, those who are looking to sell their home, no matter the reason, could run into issues.
2. Increasing number of people facing negative equity in their home: As prices plummet, the balance on your mortgage is not going to catch up. In turn, there is a chance that you could find yourself “upside down on your mortgage”, already an all too familiar phrase these days, and hoping for a recovery. In short, this means that you owe more money in your home than it is worth. Again, this is not the end of the world if you plan on staying in your home for the time being. That being said, many people are forced to relocate due to a struggling economy and this leads to more people attempting to sell from a negative equity position – something that is not easy to do, at all.
3. The market dries up: If you want to sell your home during a real estate downturn, it is probably not going to be a simple process. If the debt crisis gets any worse you can expect even more people to “tighten their belts” and stay put for the time being. Subsequently, it becomes extremely difficult to sell your home.
4. Interest rates may increase:There is no way of saying if/when this will happen. The Fed says rates are on hold for the foreseeable future, but a rise can't be ruled out after that. Those who are locked into a fixed rate loan do not have to worry about this, as long as they are going to stay in their current home. On the other hand, if you have a variable rate mortgage, you may find yourself in a precarious situation. If your rate increases too much, you may not be able to afford your payment and this could leave you with no other option but to sell, dealing with some of the issues detailed above.
How to Prepare for the Future
Everybody has their fingers crossed in hopes that the debt crisis does not worsen. But in unprecedented situations like this, you don’t want to take any unnecessary chances. There is no better time than now to prepare for issues that you may face in the future.
1. Build up your emergency fund: The more money you have in savings, the better off you will feel financially. You are never going to be happy if the economy is struggling, but doing what you can to stay financially secure is something you need to get serious about. Now!
2. Overpay your mortgage: Why are you only making the minimum mortgage payment every month? If this is all you can possibly do, so be it. But if you can afford to overpay, even if only a few dollars, you should consider doing so. This will help you build equity faster, while also showing your mortgage company that you are a good customer (you never know when you may need them for something in the future, such as if you hit a rough financial patch). It also saves you thousands of dollars in the long term.
3. Refinance your mortgage:Do you have a variable rate? If so, you should definitely consider refinancing to a fixed rate loan when possible to avoid getting hit but inevitable interest rate increases at some point in the future. Right now, refinancing rates are very low. This puts you in the unique position to do one of two things:
- Lower your monthly payment; and,
- Shave several years off your mortgage. For example, moving from a 30 year to a 15 year mortgage.