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How Can I Protect Myself From a Real Estate Bubble?
To protect yourself, follow these simple tips:
- Don't overextend yourself. Buy a house that you can afford with a traditional mortgage where you make principal and interest payments at a fixed interest rate.
- Follow the rule of thumb that you should limit your housing costs (including property taxes, principal and interest, and homeowners' insurance) to between 25% and 32% of your family's gross income.
- Don't assume that your house will continue to appreciate at the fast pace that it may have in recent years.
- Don't buy a house whose price is artificially inflated just because you're afraid you'll miss out on the opportunity to buy before prices go up yet again.
- Don't buy a house you can't really afford just because you think it's a good investment. The more real estate prices rise, the less likely they'll continue to do so. Eventually the bubble will burst, and you don't want to be caught in "bubble trouble."
- Don't indulge in cash-back refinancing and use the equity in your home to buy cars or boats, take vacations, or pay off debt (unless you're committed to avoiding the spending habits that got you into debt in the first place). It could come back to bite you if real estate values decline.
- Don't purchase real estate with an interest-only loan if you can't afford the property otherwise. These loans usually have adjustable interest rates, which could make your payments unaffordable. Once the interest-only period ends and you must start paying principal as well as interest, you may not be able to make the payments and could be forced to sell the property at a loss.
- Choose a modest home in a good neighborhood rather than buying a home larger or fancier than you need or a bigger home in a less desirable neighborhood.
- Avoid buying a house in an area that has appreciated well above the average rate of appreciation in that area over the past few years.
The bottom line: don't panic about a potential real estate bubble, but exercise caution and good financial judgment when buying real estate, choosing your mortgage type, and taking equity out of your home.
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