Sunday, September 02, 2007

Lessons from the sub-prime mortgage crisis

Estimated to have impacted about two million American homeowners with spotty credits, the sub-prime mortgage crisis continue to chug along. With their homes at stake, these homeowners and their lenders are increasingly finding the going getting tougher. According to NewYork Times, which cites the data of Realtytrac, 1.2 million homeowners have been forced to opt for foreclosures in 2006, a 42% increase from the previous year. The US Government is trying to resolve this crisis through a package comprising tax breaks to homeowners whose loans have been written off by the lenders, a federal mortgage insurance program, and modernization of Federal Housing Administration. The outcome of this, however, remains to be seen. Meanwhile, what should an invididual American investor do if he/she is seriously considering buying a home?

Perhaps the suggestions made here might err on the conservative side. But it will certainly help you to hold on to your hard earned money. And, you will own your home and not your bank. If you can afford only a rented apartment and not a home, stay where you are until you save adequate money to pay the downpayment costs. If you still want to go ahead with your new home, consider this.

1) Check your credit score. If you don't have a good credit score, this perhaps is not the right time to take housing loans. A good credit history can help you raise money at lower interest rates.
2) Don't opt for a 4 bed-room home in a four acre land, if you can afford only a two-bedroom house in a half-acre land, because the financing rates are low. Your purchases should be based on your affordability and not the availability in the market.
3) Identify the right home you want to buy. A bit of scouting/search over the internet, will help you to narrow it down. Look for deals. You may easily find one now given the spate of homes available for sale.
4) Get your loans only from a genuine lender and not a loan shark. Try and speak with different banks and lenders. Find out from them the following, interest rate on your loan, installments you have to dole out monthly, and the foreclosure taxes you have to pay. Compare them. Also, speak to your friends on their experiences. You should be able to identify the right one.
5) Once you have decided the lender, read the fine print in the documents that you will be signing. It is worth an effort.
6) Lock your mortgage at a fixed interest rate and not on a variable (adjustable) rate. This may increase your interest rate by few percentage points, but you will know that your cash outflows are going to be constant, irrespective of changes in the prime rates.
7) Ideally pay a higher down payment. This will help to keep your monthly installments low and well within the manageable limits. You may also be able to bargain a lower interest rate from your lender in such cases.
8) Once you have bought your house and taken the loan, try and pay your monthly installments on time without default. Delay's, if any, can be costly, as many lenders levy penalties.

In all, buying a home is like buying any other thing. Do the required ground work, don't take risky bets, and stick to your committment. Enjoy your new home with a freedom that you really deserve.

Madhan Gopalan

The author, based at Louisville, Kentucky, is a Global Equity Research Manager with Ness IBS, USA. The views expressed in this article are his and not that of his employer's. He can be reached at gmadhan72@yahoo.com

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