Guide to home loans. Options in a world crisis.

Guide to home loans. Options in a world crisis.

Investing in a home is always a risk. What is amazing is how we have got so used to the idea of signing a contract that binds you to paying a hefty monthly payment for twenty, thirty and even fifty years. In an ever changing world committing to anything for twenty to fifty years would sound ridiculous in every setting but home finance. This is something that only applies to “developed” countries. When I have spoken to friends in developing nations like Nicaragua about the western world and home ownership they were pretty amazed. The situation is obviously much worse for the average Nicaraguan and the average Spaniard or American but Central Americans do tend to own their home. Their home is often worth less than 10,000 dollars and comprises of a dirt floor and makeshift ply board room dividers but all the same it is theirs. I once explained to a group of friends about the current housing crisis. They didn’t understand why people were losing their homes. When they understand that the vast majority of people don’t even own a majority stake in their own home they were shocked. We might be tempted to think they are naive. I am tempted to wonder who is being naive.

How should you behave in today’s economical depression. How should the credit crisis affect your home loan financing methods? It is very early to give definite answers. And those answers, if they ever come, will be controlled by the different country and state policies. However there are some big picture ideas and concepts that can help us to make good home loan choices in a bad economy.

Thought 1. Interest rates might very well rise.

The knee jerk reaction of many countries to the current economic disaster has been to bail out banks, insure their bad loans and pretty much nationalize the banking system. This is a markedly un-capitalist measure. How such a measure will affect the traditional market forces is still to be seen. Surprisingly this economic crisis has caused home loans to become cheaper, interest rates have dropped in many countries in an effort to stimulate growth. However it is possible that natural economic trends will prevail and interest rates will increase when home loan repayment drops and loans become riskier. So if you are planning to buy a home now you should be prepared for an increase in the interest rates. Buying a house now is not a bad idea as prices hit record lows, if you have the right financing obviously. Now is the time to buy with large down payments and home loans with no or low prepayment penalties.

Thought 2. Interest only loans.

Interest only loans were a novel idea where the buyer only paid the interest of a loan for a set amount of years. These loans were great for buyers that planned to live in the house for only a few years. It would mean cheap rent for a few years and then they would sell for a large profit and repay the capital of the loan. Gone were the days where you could pretty much guarantee and increase in value of houses.