You bought the biggest home you could afford—or refinanced—taking advantage of low rates and creative financing. Who knew you could afford such a great house, or get your hands on so much cash?

But now several years later your initial low interest rate has disappeared and the adjustable rate that seemed like a good idea keeps pushing your payments higher. If that’s not bad enough, instead of increasing in value your home’s market value is slipping and appears ready to take a nose dive.

While throwing yourself in front of an oncoming train might be your initial reaction, there’s probably no need for such drastic measures. Instead you need to learn how to protect yourself and your home, should we experience a burst in the housing bubble.

Stay calm

If you can afford your house payment, a falling market is not likely to hurt you. Market values are fairly meaningless unless you are selling or refinancing. In the absence of that, your home’s market value is only a number on paper.

Stay put

While you might be tempted to bail out, selling now might cause you to suffer a loss needlessly. Enjoy your home. Time has a way of righting a slumping market.

The people who get hurt the most during real estate recessions are those who are forced to sell, usually because of a job change or because they couldn’t really afford the home in the first place. If you can hang on to a home for five to 10 years or more, you improve your chances of riding out a downturn.

Get fixed

While it’s true that interest rates are creeping upward, it may not be too late for you to refinance into a fixed-rate loan. If you have a primary mortgage and home equity loan with variable rates of interest, refinancing both into a fixed-rate first mortgage may be a wise move. With a fixed-rate mortgage you always know what to expect.

Double up

If you are in a position to target your mortgage more aggressively, step up your payments. Pay extra each month. This will bring down your debt more quickly and also lop years off your payback period.

Don’t borrow

If your home has appreciated significantly in the past few years you might be tempted to cash out the equity before you lose that gain in a potential market downturn. Don’t do it. Equity appreciation is not money in the bank. Cashing out will widen your debt and increase your monthly payment. If that equity is money you really need for some other purpose, sell your home now and downsize to a cheaper area. Otherwise, don’t run the risk of falling into a trap where you end up owing more than the home is worth.

Widen the gap

You need to maintain a healthy gap between the amount it is worth and the amount you owe—never less than 20 percent is my advice. Concentrate on widening that gap now and you’ll sail through any market downturn.

Keep up

While you have no control over housing market values, you can keep your home at the top of your neighborhood’s value by performing routine repairs and maintenance. Even in a down market your home will be more likely to stay at the top in its class when it reflects your pride of ownership.

Stay focused

While keeping abreast of your home’s current market value is interesting, it is not nearly as important as your   outstanding mortgage. That’s the number that deserves your focus and full attention.

Every dollar you pay toward the principal brings you one step closer to living rent-free for the rest of your life.


"Debt-Proof Living" was founded in 1992 by Mary Hunt. What began as a newsletter to encourage and empower people to break free from the bondage of consumer debt has grown into a huge community of ordinary people who have achieved remarkable success in their quest to effectively manage their money and stay out of debt. Today, "Debt-Proof Living" is read by close to 100,000 cheapskates. Click here to subscribe.