3 Ways to Avoid Another Real Estate Bubble

With home prices down by 30%-40%, real estate investors — even the flippers — appear to be edging back into the market. But tread cautiously, many of the same red flags and trip wires that existed five years ago are still in place today.

The good news for homebuyers is there is no shortage of great deals on the marketplace, especially in hard-hit areas like Florida, Arizona and California. While pending home sales were up by 9.2% in February, according to the National Association of Realtors (NAR), housing prices remain low and interest rates (for those with good credit) can still be had for 5%–5.25% (check BankingMyWay’s Mortgage Search Engine for the best mortgage deals).

But before you pull the trigger, keep these factors in mind — factors that can save you a lot of money and a lot of headaches that many homeowners who bought at the top of the real estate bubble in 2005 are already suffering through.

Remember, even though prices are lower, some common sense tips still apply.

Aim Low With the Monthly Payment: In the past few decades, millions of Americans aimed way too high with their monthly mortgage estimates. When the economy collapsed, and jobs were lost, those higher monthly payments proved to be a huge burden for homeowners. Aim low and try to keep your monthly mortgage payment below 25% of your estimated total monthly income. That should give you some breathing room if you lose your job or suffer from the kind of health issue that keeps you from working.

Beef Up the Down Payment: Back in 2005, banks were fairly liberal about no-document, low-down payment loan deals — some that required no down payments at all. That may appear to be a good deal on the surface, but not really. The lower your down payment, the higher your mortgage (and the higher your monthly payment). If you can’t get at least 15% (and, ideally, 20%) on a down payment, wait and save until you can. The difference in money saved on interest payments over the course of the loan alone (not to mention the lower monthly payment) is worth the wait.

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