Learning from the housing crisis

Did you ever think you would see an article that has ‘housing crisis’ in the title but is actually based on good news? Well, if you did, then you were right because this article is all about good news. I recently read an interesting report in the LA Times (click here to read it) about how home owners in the US are changing how they handle refinancing of their homes. It appears that very useful and important lessons have been learned from the housing crisis. This change was very necessary to avoid a future housing crisis that would likely return at some point if home owners did not have a shift in how they look at their biggest asset.

For a rather long time and leading up to the housing crisis when it was time to refinance a mortgage the vast majority of Americans chose to take out money that was built up as equity since the last time they refinanced. This was possible because homes virtually always kept going up in value. This meant that they now carried more debt because withdrawing the built up equity just increased their overall mortgage balance. However, as long as the homes continued to rise, it was manageable because you can always sell it and have that money pay off that extra debt. This is very flawed and dangerous thinking as we witnessed first hand in the housing crisis. However, not all the blame is with home owners since a good number of them were not even born the last time homes went down in value.

Regardless, the housing crisis showed everyone that a home, just like any other investment does carry some risk of decreasing in value. This meant that the very popular trend I just outlined above is not sustainable. Thankfully, it appears the average home owner got that message and a new trend is growing in popularity. This one however, is smart, fiscally responsible and is the best way of handling refinancing.

This strategy involves using your savings to pay down some of your mortgage when it is time to refinance. Essentially it means that you increase your down payment over time, which lowers your overall mortgage balance and your mortgage payments. Obviously, this option is not available to everyone because if you don’t have money locked away in a savings account of some sort than you don’t have the money to put in to your home.

You might be thinking, why is it beneficial for me to take money out of my savings and pay off my mortgage? Well, the reason is because it can net you a better interest rate, better terms and reduced fees like insurance premiums because you will be considered less risky by your lender. Also, by just having your money sitting in the bank does not offer much of a return, whereas by doing this you see more money in your pocket due to the lower rate and lower mortgage payment. This is also putting you closer to paying off your home in general which is always nice.

Shifting to this trend for the greater economy is absolutely essential as it reduces the unsustainable debt level that people had and it makes people better able to withstand various future problems like being laid off, increasing interest rates and recessions. The fact is, if most people would have used this method in their finances until now then it is very possible that we would not have a housing crisis and a 100% certainty that if we did, it would not be as bad and many people that were hurt by it would not have been.