Mortgage Calculator

Before falling into unsustainable debt, it’s important to use a Mortgage Calculator such as the one below that helps you determine your monthly mortgage payment and the time it would take to pay off your debt.

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Mortgage Summary

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See how your payments are allocated between interest and principal over time.

Total Home Ownership Cost

The total cost of home ownership is more than just mortgage payments. Additional monthly costs include homeowner's insurance, property taxes, Home Owners Association (HOA) dues or Condo fees, and maintainance costs. Use the options below to calcuate the full cost of homeownership. Enter your zipcode for more accurate estimates of property taxes and insurance.
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Your housing costs relative to your income is greater than of all homeowners

Tips

Save on interest if you are willing to make payments every two weeks.

Making smaller payments every two weeks instead of once a month saves you interest and pays down your loan faster. How? By making payments every two weeks you actually end up paying more per year (the equivalent of one extra monthly payment).

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Make extra payments of toward your loan and save more.

Making extra payments every month can reduce the total amount of interest paid and help you pay off your loan faster.

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Cities Where People Are Most Overleveraged on Their Homes

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Ask the Experts

As one of the biggest financial transactions of our lives, the purchase of a home should be done after careful assessment of our finances and the impact that a mortgage will have on them. For financially inspired advice on both buying and owning a home, we asked a panel of experts to weigh in. Click on their profiles to read their bios and thoughts on the following key questions:

  • Is now a good time to buy a home?

  • What are the most common financial mistakes people make when buying a home, and which are most costly in the long-term?

  • If someone is currently overleveraged and has trouble affording their mortgage payments, what steps should they take?

  • Is there any way for an individual to tell if his or her local housing market is overpriced?

  • Are there certain housing markets or circumstances in which it is acceptable to be overleveraged in mortgage debt? If so, how much is too much?

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William Wheaton

Professor in the Department of Economics and in the Center for Real Estate at Massachusetts Institute of Technology William Wheaton Is this a good time to buy a home?
Yes - last year was even better. Buying "at the bottom" is an opportunity that does not come along often.

What are the most common financial mistakes people make when buying a home and which are most costly in the long-term?
  • Variable rate mortgage because you think you are going to move, but you don't.
  • Believing that prices never go down and always go up.

If someone is currently overleveraged and has trouble affording their mortgage payments what steps should they take?
Apply for HARP.

Is there any way for an individual to tell if their local housing market is overpriced?
People can tell if their local housing market is overpriced if:
  • Prices are above replacement cost (land and structure).
  • People are buying more/bigger housing than they need "Because it’s a good investment'.
  • People are buying second homes.
  • Once you adjust for general economic inflation, you find prices have never been this high.

Are there certain housing markets or circumstances where it is ok to be overleveraged in mortgage debt? If so, how much is too much?
You could be highly leveraged (e.g., 90%) if the market is very stable (e.g., Dallas) and you are planning to live there for decades – hence the amortization will actually provide you with slow steady wealth creation.
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Yongqiang Chu

Assistant Professor of Real Estate and Finance in the Moore School of Business at University of South Carolina Yongqiang Chu Is this a good time to buy a home?
Generally speaking, yes, mainly because of the historically low mortgage interest rates. However, specific answers to this question will have to depend on the very place in which you want to buy a house. Some places may be expected to have higher and higher prices in the future; there it is obvious that one should buy as soon as possible. There are many other places, however, where prices are stable or even in a declining trajectory; there it may not be a good idea to buy.

What are the most common financial mistakes people make when buying a home and which are most costly in the long-term?
I think the most costly mistake one can make is to over-spend (or over leverage) on housing. One has to make realistic assumptions about how much they will be able to spend on mortgage monthly payments. In particular, home buyers need to pay special attention to their mortgage contract details. Many mortgages in today’s world offer what’s known as a teaser rate for the first several years, then the rates increase dramatically after that. If a home buyer only considers the initial affordability, they may get into big financial trouble later on!

If someone is currently overleveraged and has trouble affording their mortgage payments what steps should they take?
There are three steps one can take:
  • Refinance: check with your lender or other lenders to see if you can refinance your existing mortgage to a new one with lower interest rates. The mortgage interest rates are very low nowadays, so if you bought your house before the financial crisis and never refinanced your mortgage, chances are you will be able to save a lot by refinancing. Even if you bought your house after the financial crisis, you can still check to see if you can get a better deal.
  • Loan modification: till this day, there are still many federal and state-level loan modification programs that can potentially lower your mortgage payments. So, struggling home owners can check those loan modification opportunities.
  • Sell the house: if you can sell the house for more than what you owe, then selling the house will (1) help you avoid foreclosure (2) generate some cash, which you may be able to use as down payment to buy a less expensive house. If your mortgage is already under water, then check with your lender if short selling is an option.

Is there any way for an individual to tell if their local housing market is overpriced?
I have to say it is very hard, if not impossible. However, if the median price to median income ratio in your local market is more than 5, I would say there is a chance that it is over-priced.

Are there certain housing markets or circumstances where it is ok to be overleveraged in mortgage debt? If so, how much is too much?
I would say overleverage in mortgage debt is never a good idea and is always extremely risky. Before the crisis, people used to think that overleveraging is OK as long as house prices keep going up. But as it is evident during the financial crisis, those people paid a huge price for that!
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Itzhak (Zahi) Ben-David PhD

Neil Klatskin Chair in Finance and Real Estate, and Director of the Center for Real-Estate at the Ohio State University, Fisher College of Business Itzhak (Zahi) Ben-David PhD Is this a good time to buy a home?
It depends a lot on the location. The market seems to have made quite some way from the bottom in 2009-2010. It feels like in most locations there are no bargains anymore; there is no lack of demand. In a way - the market has stabilized, so you get what you pay for.

What are the most common financial mistakes people make when buying a home and which are most costly in the long-term?
Our research shows that people are not very good at predicting outcomes related to housing. For example, people often choose the wrong mortgage underestimating the chances that they will move or refinance in the future. Also, people who consider selling their homes delay the sale because they are at a loss (relative to the purchase price). Delaying, however, will not bring the lost money back. When making purchase of sale decisions, people need to think about the future, not about the past.

If someone is currently overleveraged and has trouble affording their mortgage payments what steps should they take?
Negotiating with the lender is always a good idea. Lenders always prefer borrowers to stay in their homes rather than defaulting. Borrowers should seek help and counseling at community centers. In cases where the negative equity is significantly large, borrowers may want to consider defaulting. There are negative consequences to defaulting (e.g., sharp decrease in credit score), so one should always seek professional advice before taking such actions.

Is there any way for an individual to tell if their local housing market is overpriced?
The ratios of price-to-rent or price-to-average income are indicators that people use. If these ratios are high relative to historical ratios or comparable areas, it is possible that the local housing market is overpriced.
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Jason Beck

Associate Professor of Economics at Armstrong State UniversityJason Beck Is this a good time to buy a home?
Yes, it is a relatively good time to buy in that mortgage rates are still low by historical standards, and the opportunity cost for money is also low (returns on bonds and other financial instruments are low so you're not missing out on a lot by dropping money in a home).

What are the most common financial mistakes people make when buying a home and which are most costly in the long-term?
A common mistake for many people is buying in the first place. Many people don't want to "throw money away" on rent and wish to build equity, but given the way the loans are set up, you really don't chip much away at the principle the first few years; it (almost) all goes to interest. If you plan to stay put for a while (5+ years?): buy. Else, consider renting.
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Dana Kuhn

Lecturer in Real Estate Development at San Diego State UniversityDana Kuhn Is this a good time to buy a home?
In most markets, and assuming one has the down payment to avoid paying mortgage insurance, buying a home is the smart play. If your household is earning enough to afford the payments, chances are you need an income-tax deduction. The interest write-off on an owner-occupied residence is substantial in the first few years of a loan. Adding mortgage insurance to a payment makes the equation less certain and more dependent upon the probability of appreciation in a given market. To help with that calculation, I recommend "rent vs. buy" calculators online. You will need to know the monthly rent and equivalent house price.

Is there any way for an individual to tell if their local housing market is overpriced?
I would say that if your market is still below peak pricing of the mid 2000s, there is still room to grow. California's home prices in general are still below that threshold. But San Francisco has exceeded its historical peak and has to be considered in bubble territory again.
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Edward Glickman

Adjunct Professor of Real Estate Finance at Drexel University's LeBow College of Business Edward Glickman Is this a good time to buy a home?
Yes. While prices have recovered in many markets, the current U.S. average home price is just over $210,000, well below peak levels. Interest rates remain low by historical standards. The combination of reasonable prices and low interest rates makes owning a home affordable to many Americans.

Regardless of the fact that many Americans can afford to buy a home, homeownership has lost some of its luster in the media. Renting is all the rage and the fraction of Americans who own homes has fallen by 7%. As a result, the rate of new home construction has fallen dramatically from pre-crash levels.

This new love affair with apartments may be short lived. Many young people who lived in their parents’ basement and delayed starting families are now facing the biological clock. If they all come out at the same time, start families and go house shopping before supply ramps up, prices could rise dramatically.

What are the most common financial mistakes people make when buying a home and which are most costly in the long-term?
One critical mistake is to think your mortgage payment is your only cost of homeownership. Buyers need to do a full financial plan before entering the market. Homeownership entails many costs, such as ongoing repairs and upkeep. In addition, funds must also be set aside to cover a period of lost wages from illness or job loss.

If someone is currently overleveraged and has trouble affording their mortgage payments what steps should they take?
First, understand the source of the problem: is it temporary or long term? If it's a temporary problem, this may call for reviewing all personal expenditures (cell phone, cable, restaurants, etc.) to develop a plan to get through the lean period. If it's a long term problem, meet with a mortgage banker to see if the loan can be modified or refinanced. If the problem is insolvable, assuming the house value exceeds the debt, sell the house now and rent or buy a cheaper house. Do not share the reason with your broker, who does not need to know it’s a fire sale, and do not wait for the point of foreclosure, when it is likely all of your equity will be lost.

Is there any way for an individual to tell if their local housing market is overpriced?
If you intend on living in a community where your family has lived for a hundred years, then you face that market, overpriced or not. The relative pricing in other markets doesn’t matter. Your only alternative is to rent. However, in hot markets, rental housing is also expensive. If you intend to stay in an area and the after-tax cost of homeownership is not significantly higher than the cost of a rental, consider buying. The only time to consider waiting is when you know that there is a glut of new housing under construction - for this information, read the local business press.

In contrast, if you are a short term resident, renting is the best course of action. Don’t view a hot market as a way to make a quick fortune. It can be risky; you don’t want to give up the opportunity to chase your dream job in another city because you are tied to a house you cannot sell.

Are there certain housing markets or circumstances where it is ok to be overleveraged in mortgage debt? If so, how much is too much?
There is no absolute answer to this question as it reflects an individual's tolerance for risk and the expected trajectory of their future income. On average, spending more than one third of your income on total housing costs is considered high. In certain cities in the U.S. however, housing costs often exceed 50%. Remember, the mortgage payment is only one cost of homeownership.

In general, being overleveraged is a bad idea. Buy the house you can afford. When your financial circumstances improve, trade up. By that time, your life circumstances and tastes may also have changed and your new house will more closely reflect your current needs and desires.
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David Bieri

Associate Professor of Urban Affairs and Real Estate Faculty Fellow in the School of Public & International Affairs at Virginia Tech David Bieri Is this a good time to buy a home?
Among all financial markets fantasies, the question of perfect market timing is perhaps the most captivating: if only one could know with complete certainty what markets will do tomorrow – much like Biff Tannen did with the help of Gray’s Sports Almanac in “Back to the Future”! While market timing with 20/20 foresight will forever remain a sci-fi dream, there are a few simple concepts in terms of understanding asset returns that can make the timing question less daunting.

Analogous to other financial assets such as shares or bonds, the overall returns from owning a house come from two sources: First, there are capital gains from price appreciation, and, second, there is the income stream that the asset itself generates. In the case of housing, rather than receiving income in terms of dividend or interest payments, one can think of the income return to housing as the imputed rent that you can pay yourself as an owner-occupier.

Thus, while it is tempting to evaluate homeownership only in terms of the potential for capital gains, we have to look at the full equation of what economists refer to as the “user cost of housing”. This measure includes both the cost of finance and the overall tax burdens from owning a home.

Despite the fact that house prices have crept back up to pre-crisis levels in some high-cost cities such as San Francisco and New York, the cost of home ownership still remains at its most affordable in over a generation: Interest rates are at or near historic lows, with the average 15-year fixed-rate mortgage just below 3% and 30-year rates hovering around an incredible 4%.

Furthermore, relative to renting, homeownership in the United States comes with a substantial preferential tax treatment in the form of the mortgage interest deduction, local property tax deduction, home equity line of credit deduction, and capital gains exclusion – to name but a few of the most prominent tax benefits.

What’s more is that home ownerships can also be viewed as some form of forced saving which, in contrast to renting, builds equity over time. In sum, all of the above simply just means one thing: Now is a pretty good time to buy a home!

What are the most common financial mistakes people make when buying a home and which are most costly in the long-term?
When buying a home, it is not only the direct cost of homeownership, but also indirect costs that must be evaluated. Indeed, the old adage “location, location, location” reminds us that how much rent or mortgage you pay is only part of the equation when evaluating the affordability of a particular home. The other part of the equation is the cost of transportation associated with living in a given location, as, on average, transportation is the second-biggest budget item for most American families.

Thus, instead of merely focusing a narrow notion of affordability, we should really consider “location affordability” which includes the cost of transportation in addition to the direct user cost of housing. Put differently, by simply relying on the “driving until you qualify” as a rule of thumb, one forgets that the cost of transportation associated with long commutes (including the opportunity cost of being stuck in traffic) can present a significant financial burden, particularly in the longer term as the cost of energy remains volatile.

For example, while the median households in mid-town Manhattan spend on average 43% of income on housing, an equivalent household in the far fringes of the suburbs in Kansas City spends only 26% of income. At the same time, however, the Manhattanites spend only 11% of income on transportation, whereas the Kansans spend 36% of income on transportation. In terms of overall location affordability, then, living in the suburbs of Kansas City (26% + 36% = 62% of income spent on housing and transportation) is less affordable than living in Manhattan (54% of income). For more details or info on understanding the combined cost of housing and transportation, see the federal government’s website on location affordability).

If someone is currently overleveraged and has trouble affording their mortgage payments what steps should they take?
In order to fully grasp the problematic elements of leverage, it is useful to recall the difference between a liquidity impasse (i.e., a temporary cash-flow problem) and a solvency issue (i.e., a situation where debts exceed assets). In the case of the former, a short-term increase in leverage (via additional borrowing) might actually help resolve the issue until leverage falls back to more sustainable level, after, for example, an illiquid asset, such as a piece of real estate, has been sold.

Unfortunately, however, much of the troubles that beset households in the wake of the Great Housing Bust were due to solvency issues because of negative equity, in which case, short of a short-sale or foreclosures, the best course of action was to pursue a loan modification. In the case of the federally-sponsored Home Affordability Mortgage Program (HAMP) which still runs until the end of 2016, this is achieved by adjusting your interest rate, extending your term, and reducing or forbearing your principal.

Is there any way for an individual to tell if their local housing market is overpriced?
The identification of asset bubbles has not only been tricky for average investors, but, in light of the Great Housing Boom and Bust, it has even proved too difficult for the policy mandarins at the Federal Reserve. Indeed, when house prices hit absolute rock bottom in late 2011, it seemed near impossible that house prices could claw their way back to anywhere near pre-crisis levels in as little as five years; yet, in some of the most desirable metro areas like San Francisco, house prices have just gone past the peak-levels reached at the height of the Great Housing Boom over a decade ago (Q4 2005)!

In this sense, conventional metrics for assessing pricing in the housing market such as price-to-rent ratios or price-to-income ratios might fail to accurately reflect the state of housing costs. Instead, as highlighted above, it is more useful to look at the cost of home owning in terms of the imputed annual rental cost of owning a home, i.e., some form of the user cost of housing.

Are there certain housing markets or circumstances where it is ok to be overleveraged in mortgage debt? If so, how much is too much?
As with all numbers in finance, there is no magic number and threshold as to how much leverage a given household can tolerate for how long. Beyond the conventional prudent limits of 75-80% LTV, specific capacity to absorb a (temporary) increase in leverage entirely depends on the specific cash-flow details of each situation; i.e. stability of household income, the stage in the life-cycle, access to credit and, above all, personal consumption preference in terms of how much one might want to spend on housing.

A young professional in her early 30s might prefer to spend a large share of her income for purchasing a condo in trendy Capitol Hill in Seattle, because – in addition to a reasonable resale value – it affords her many desirable live-work-and-play consumption amenities in terms of restaurants, coffee shops and clubs. At the same time, a couple of college professors of the same age might prefer the great outdoors to nightlife, living in a low-leverage fixer upper on the outskirts of Ashville, leaving them plenty of disposable income to enjoy the latest in outdoor gear and equipment in the Great Smokies and the wonders of the Appalachian Trail.
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Humnath Panta, Ph.D

Assistant Professor and Finance Program Director in the School of Business and Mass Communications at Brenau University Humnath Panta, Ph.D Is this a good time to buy a home?
Whether it is a good time to purchase a house or not, the answer depends on your plan. If you believe you’ll be in your house at least for the next 4 to 5 years, I recommend buying a house in a safe and good neighborhood. However, if you expect you are not is a position to hold a house for next 4 to 5 years, I recommend deferring your purchase plan, unless you get a bargain deal.

What are the most common financial mistakes people make when buying a home and which are most costly in the long-term?
One of the most common financial mistakes people make when buying a home is not analyzing about their personal circumstances such as job satisfaction, plan for a new job, etc. and purchase a house even though they are planning to move on to a new job. I believe this is one of the very grave mistakes. If you do not have a conducive environment in your current job, and you think it is necessary to change your job in the near future, do not purchase a house. In other words, if you are not sure that you will be staying in the house you plan to buy for at least a few years, it is one of the serious mistakes you're making unless it is not your first residential home and you expect to rent. Secondly, people do not plan their budget and just see the current picture of their financial situation. I think it is another mistake people make while buying a home. It is critical to prepare a personal budget and do a basic scenario analysis. If your income goes down, can you still afford the monthly payment? Another mistake people make is not considering other costs such as repair and maintenance associated with a house, especially if it is not a new house, including property taxes. Finally, another financial mistake people make when buying a home is a lack of basic knowledge about the relationship between closing costs and the mortgage rate. Without understanding a link between interest rates on the mortgage and closing cost, people bargain very hard for a lower rate at the expense of closing cost. You can reduce your closing costs significantly if you are willing to pay about 12.5 basis points higher interest rate for a mortgage. The credit you will get from a lender at the given rate may cover most of your closing costs. Currently, we have historically low mortgage rates, and I do not see a possibility to significant increase in mortgage rates in the near future. Therefore, you can always refinance your house with a lower rate unless your current mortgage has prepayment penalties.

If someone is currently overleveraged and has trouble affording their mortgage payments what steps should they take?
I believe this is the best time to sell a house if you can’t afford to hold the house at least 4 to 5 years. If you do not see any potential to boost your income, and you are currently overleveraged and have trouble affording mortgage payments, the best option for you is to sell the house.

Is there any way for an individual to tell if their local housing market is overpriced?
This is a very tough question to answer because it is very hard to compare even similar houses in two neighborhoods in proximity because of the differences in neighborhood characteristics, including the school district. Therefore, we need a reliable model to find whether the local housing market is overpriced or not. I think the best way to find whether your house is overpriced or not is to compare monthly house payment at the expected sale price of your house and the expected rental income from your home. If the monthly rental income does not cover your monthly mortgage payment, including the property taxes, I would consider your house in the local housing market as an overpriced property.

Are there certain housing markets or circumstances where it is ok to be overleveraged in mortgage debt? If so, how much is too much?
If the housing market is just recovering from a downturn or a recession, it is okay to be overleveraged in mortgage debt since there is a high probability of price appreciation, and it is easy to sell a house when needed. I consider current housing market on the top of the expansion phase. Therefore, I consider overleveraged in mortgage debt in the current market condition only if one’s monthly mortgage amount is over 25% of his or her household monthly take-home pay. In other words, if one’s monthly household monthly take-home pay is $5000, the mortgage payment should be no more than $1,250.

Again, it is okay to be overleveraged in a mortgage debt if the housing market is in the recovery phase. However, I do not recommend your mortgage payment to be more than 40% of your household monthly take-home pay. For example, if your household monthly take-home pay is $5000, your mortgage payment should be no more than $2000. If you expect the housing market at the pick of its recovery phase from a major crash, it is very dangerous to be overleveraged in mortgage debt.
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Jim Conklin

Assistant Professor of Real Estate in the Department of Insurance, Legal Studies, and Real Estate at University of Georgia, Terry College of Business Jim Conklin Is this a good time to buy a home?
Unfortunately, there is no one size fits all answer to this question. Individuals need to compare the cost of renting to the cost of owning in their local real estate market. The cost of renting (rent), is straightforward. The cost of owning, which economists call the user cost of owner occupied housing, should take into account all the costs of owning a home (interest, depreciation, maintenance, property taxes, insurance, etc.), appreciation (which reduces the cost of owning), and the way the tax code treats each of these costs.

In addition to the costs of renting versus owning, it is important to note that renters and homeowners face different risks. Homeownership is typically viewed by economists as riskier, but the risks vary by individual. Thus, individuals should consider their willingness to take on risk when deciding whether to rent or own.

To summarize, individuals need to compare the costs and risks of renting and owning when deciding whether to buy a home.

What are the most common financial mistakes people make when buying a home and which are most costly in the long-term?
When buying a house, people often invest a large share of their wealth into the home. In addition, they borrow a large fraction of the home’s value in the form of a mortgage. In effect, these buyers have a highly leveraged, relatively undiversified portfolio. In other words, this is a risky wealth accumulation strategy, and I think people often underestimate this risk.

If someone is currently overleveraged and has trouble affording their mortgage payments what steps should they take?
The first step is to contact the current lender (or mortgage servicer) as soon as possible. From the lender’s perspective, foreclosures are costly, and it is often in the lender’s best interests to explore other alternatives if the borrower is truly experiencing financial difficulties.
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Dragana Cvijanovic

Assistant Professor of Finance in the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill Dragana Cvijanovic Is this a good time to buy a home?
The answer to this question depends on individual circumstances: having in mind that the average employee tenure in the U.S. is 4.6 years, and 3 years for Millennials, it’s understandable that many people will be skeptical about committing to putting a large chunk of money down to live in one location. Having said that, if one is interested in buying, 2016 seems like a fairly good time to do so. Given the low supply of rental units, and increasing demand, rental rates are continuing to rise. Around 70% of property managers predict that rental rates will increase in 2016. Coupled with the fact that interest rates are at the historical lows (average 30-year fixed rate as of April 2016 is 3.59%), the lowest it has been since May 2013, this indicates that it may be a good time to buy now. A year ago, the 30-year was 4.23%. The trend has clearly been down, however, some of the biggest names in the market are fully expecting rates to move higher in the future. Even if the rates take a further dip this year, the best approach is to buy a home when you can afford it and when it is optimal for your individual circumstances. There’s a saying on Wall Street: “Don’t try to time the market.” This also applies to real estate. The number one factor is your ability to afford a home without becoming overleveraged.

If someone is currently overleveraged and has trouble affording their mortgage payments what steps should they take?
Careful financial planning should help you avoid these situations. Nonetheless, if your personal circumstances are such, there are a few options that you can take. The most obvious option is to refinance your existing mortgage. There are two routes that can be taken when refinancing: first option is to lower your interest rate, or chose a fixed-rate mortgage rather than an adjustable rate mortgage. Currently, with fixed rates at historical lows, it may make sense to switch to fixed rate mortgage, and lock in the lower rate. Bear in mind that a 1% reduction in your mortgage rate can save you around $2000 per year. Second option is to extend your mortgage term. A longer loan term usually goes hand-in-hand with an interest rate reduction, and it can help reduce the cost of your monthly payments. However, you may end up paying more for the total cost of your home. But if you're in need of a quick-fix, a longer loan term might be an option for you.

Another option is loan forbearance. A loan forbearance helps you avoid foreclosure by reducing or limiting your mortgage payments for a fixed period of time. After that time period, you will need to make up the missing payments plus pay your current payments. If you've missed a several mortgage payments, you might be able to work out a repayment plan with your lender. Basically, this involves an agreement to pay back the overdue amount over a period of time. These options are all short-term solutions, and rely on the assumption that you are going through a tough financial time only temporarily, but you anticipate getting back on your feet quickly.

Is there any way for an individual to tell if their local housing market is overpriced?
Among various metrics that economists have traditionally used to measure the frothiness of the housing market, two affordability measures have gained the most traction with the media.

A fairly easy way to gauge a home's value is to borrow a tool from the stock market. In the most basic method of stock valuation, investors look at its price-to-earnings ratio, a comparison of a company's share price to its annual profit. The higher the ratio, the more expensive a stock is relative to its underlying value. A similar approach can be used for real estate markets, by calculating its price-to-rent ratio, which measures how much the buyer is paying for each dollar of received rent income (or dollar saved from rent spending). Rents, just like corporate and personal incomes, are generally tied very closely to supply and demand fundamentals; one rarely sees an unsustainable "rent bubble" (or "income bubble" for that matter).

Another measure, the price-to-income ratio is the basic affordability measure for housing in a given area. It is generally the ratio of median house prices to median familial disposable incomes, expressed as a percentage or as years of income. A recent study by the Economist has looked at these two ratios, finding that the affordability is stretched in San Francisco with house prices at 9 times household income and nearly 20 times annual rents. These figures should be compared to a long-term city average of 6 times income, and a national average of 3.3 for income and 11 for rents. In contrast, housing appears to be undervalued in Detroit and Pittsburgh where prices are just over two-times median household income. Over time, prices should adjust to return affordability ratios to their long-run averages. However, measures of affordability are also affected by interest rates, which are at an all-time low, making housing artificially cheap to buy.

Are there certain housing markets or circumstances where it is OK to be overleveraged in mortgage debt? If so, how much is too much?
This is a million dollar question. The answer depends on your appetite for risk, the depth of your pocket (cash reserves in case things go south), level of financial literacy, relationship with your lender, and your view on the interest rates and the local housing market. If you are comfortable with high risk and can actually get a mortgage that takes up a significant amount of your income, while having a view that the local market is going to go up, then this strategy makes sense. The trouble is, that you never know what’s going to happen with the local market, and if your mortgage to income ratio is too high, with no significant cash in your pocket to cover your losses should the market conditions change, you are poised for a very bad financial outcome should the local house prices tank.
Back to All Experts

Charles F. Wu

Senior Lecturer of Business Administration at Harvard Business School Dragana Cvijanovic Is this a good time to buy a home?
It depends on the individual (or couple's) lifestyle and needs. Will they need flexibility with their jobs and have to move within 3 years? Are kids in the near term horizon when neighborhood schools will be important? Is one's income fairly steady or are they in a startup which may not be generating regular paychecks? All those criteria beg the question, how much flexibility do they need and will they be forced to sell their house during a downturn? I think however, that your question is "where are housing prices going from here?"

Nobody can say with certainty but a couple of factors one should consider are:

  1. Home prices in most markets have recovered to at or above pricing prior to the financial crises. Certain markets, such as San Francisco and New York, have seen housing prices well surpass the peak pre-recession pricing and are seeing a flattening of absorption.
  2. The national average of households that own their homes is down from 68% pre-recession to 63% today. It is unclear as to whether this is a secular trend or a temporary decline which will bounce back, thereby creating a mass buying wave.
  3. The economy has picked up and new housing construction is well underway to meet builders' expectations for continued strength.

What are the most common financial mistakes people make when buying a home and which are most costly in the long-term?
Overleveraging themselves as buyers are seduced by historically low interest rates. If the Fed begins to raise rates, borrowers on floating rates will feel the squeeze quickly when their mortgages reset. Borrowers who fixed their rates will feel the pain if they need to sell their homes (see #1) in markets where the new buyers are facing much higher financing costs.

If someone is currently overleveraged and has trouble affording their mortgage payments what steps should they take?
Ideally, with rates having come down to current levels, they may be able to refinance at a lower rate or stretch out the maturity of their mortgages, thereby lengthening the amortization period (and therefore reducing monthly payments). Perhaps they can discuss with their lender ways to restructure their loans. Most lenders will not even enter into discussions, which puts borrowers in the difficult position of seeking new sources of equity or risking default. The latter option has long term ramifications and should only be a last resort.

Is there any way for an individual to tell if their local housing market is overpriced?
One can look at the behavior of new buyers. Are they waiving contingencies? Giving special bonuses or gifts to brokers or sellers to distinguish their offers? Are winning bids the ones that are "all cash" buyers? Are properties being snapped up within 3-5 days of the open houses? Are buyers saying "I have to buy it now because it will only be more expensive when I can really afford it?" These are all signs of frothy markets.

Are there certain housing markets or circumstances where it is OK to be overleveraged in mortgage debt? If so, how much is too much?
This depends more on the resources, career plans, flexibility, and escape hatches of the buyer than on the market. All markets change and one should not get complacent in any market.

Community Discussion

Leverage the expertise of the WalletHub community to make better decisions.

Linda Lear @lindal_45
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Do you accept mobile homes as down payments?

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Sandress Roberts @sandressr
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Not looking for a home that cost that I'm Looking for rent to own.

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Roneil Elbrader @roneile
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I missed four months of my mortgage due to decrease in income so my bank was either going to foreclose or I could do a loan modification. I made my three good faith payments. They forced me to start an escrow account to cover my insurance and taxes but did not state that my loan which was 17 years into a 30 year fixed loan at 7.125% would restart again at 30 years and they read more

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