The Negative Equity Crisis: How it May Affect Home Mortgages

By Jonathan Haeber
CMR Columnist

MSN Money says that we're in an "epidemic" when it comes to home mortgages. One in 10 homeowners has no equity in their home--some even have "negative equity." As more homeowners take up interest only mortgages (and the reverse mortgage) more people will end up in debt or bankruptcy. What's this mean to you, the prospective home buyer?

They've been calling it the "democratization of credit." Anyone, no matter what their past credit history or current financial situation, could find a home mortgage. The upside to this new, consumer-friendly credit climate is that mortgages, especially reverse mortgages and interest only mortgages are available to them. People who could not have bought a home earlier now have the opportunity to do so.

The Age of Home Ownership

President Bush has touted this as the age of home ownership. At no other time in history has such a large segment of society become homeowners. But do more lax mortgage requirements come with a price? Will it have an effect on future home prices? If recent statistics are any indication, then yes, they may.

In order to understand why MSN Money calls this a "negative equity epidemic" we should look at the consequences of large numbers of people defaulting on their loans. If banks have to foreclose on multiple homes, the local market will see a glut of homes, increasing the supply of homes and decreasing demand. This will be even more pronounced in the coming years.

The Dangers of Interest Only and Reverse Mortgages

According to RealtyTrac, a foreclosure tracking firm, in February of this year more than 117,000 properties were foreclosed on; this is up 68% from February of the previous year, and it partly explains why price appreciation has stagnated.

If you're a prospective home buyer, then here are a few tips to follow:
  • Beware of "teaser rates." These are very low introductory rates on a home mortgage, often much lower than the market rate. However, they don't stay that way for long. Teaser rates often go above and beyond market rates after the introductory period is over.
  • Maintain your credit-worthiness. People with better credit are more likely to lock in a lower rate and have access to less risky loans.
  • Lock in a rate. Avoid taking interest only mortgages or reverse mortgages, and only take them if you're aware of the risks and feel you can afford periodic interest rate changes in the future.

Source
MSN Money: The Negative Equity Epidemic

About the Author
Jonathan Haeber is a marketing writer for Discovery Channel Stores. He recently purchased his first home, and took a self-taught crash course in home mortgages.

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