The mortgage crisis in 2007 was caused by flawed financial modeling and the assumption home prices only increase -- as well as greed and fraud. The decline of home prices increased housing debt devalued mortgage-backed securities and collateralized debt obligations. These combined incidents resulted in increased foreclosures because homeowners couldn’t afford their mortgages and ultimately financial institutions collapsed. This crisis occurred from 2007-2010 and contributed to the December 2007- June 2009 U.S. recession.
Here are five lessons we’ve learned from the Mortgage Crisis:
1. Buy your home to live in, not as an investment
During the housing bubble people bought homes as investments – not as their primary residence. These homebuyers assumed their homes’ worth would increase, not decrease. With people buying these homes at a quicker pace than normal and over borrowing, the bubble popped. This resulted in many Americans losing their homes. The lesson here is to buy a home to live in and not an investment unless you are willing to take the risk or have a safety net.
2. Have an emergency fund
It’s recommended to have an emergency fund with at least six months’ worth of expenses in an accessible account. You never know what’s going to happen. You might need to take care of unexpected problems and there is always the risk of losing your job.
3. Research mortgage plans
During the housing bubble, too many people invested in risky or adjustable-rate mortgages which caused monthly payments to skyrocket. Borrowers believed they could refinance before their mortgages reset, but that wasn’t the case. Homeowners couldn’t make their mortgage payments and since the price of their home fell into negative equity, they couldn’t receive approval for their refinance. Be sure to do your research on the types of mortgage plans and don’t always trust interest-only mortgages or adjustable-rate mortgages.
4. Buy a home you can afford
A prequalification should give you an estimate of what you can reasonably afford. You need to factor in extra expenses such as lawn care, home repairs and maintenance before purchasing a more expensive home. Buy a home you can comfortably afford.
5. Owning a home might not be for you
Buying and owning a home is a lot of responsibility, from making payments to unexpected costs; it can be stressful to maintain. Not everyone is cut out to own a home and renting is still a great option.