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Archive for Friday, February 12, 2010

Mortgage payments make economic sense

February 12, 2010

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— Increasing numbers of homeowners who can afford their mortgage payments and have no plans to move are still wondering if they should walk away from their home because the value has dropped.

During a recent online discussion, reader “Florida Chick” wrote that her house cost $550,000 when she bought it new in 2006. She put down 20 percent. She has a 30-year fixed mortgage of 6.125 percent. Her house is now worth about $350,000.

“I am going broke using savings to pay this mortgage,” she wrote. “I want to walk and rent. Why shouldn’t I? I do not want to be an American sucker.”

If Florida Chick has to use her savings to pay her mortgage, she already was in trouble long before the housing bubble burst.

Common frustrations

Her frustration is what I’m hearing from a lot of other people: They feel duped because the value of their homes has decreased. Since others have walked away, the Florida homeowner feels she’s within reason to negate her promise to pay.

This walkaway strategy is relevant only if you can’t pay the mortgage. The current value on your home only matters if you need to move and you can’t sell the home for enough to pay off the mortgage. In both cases, you have a serious problem.

Before the recession and the equivalent of a housing market earthquake, many borrowers bought into the notion that their homes would always increase in value. We know now that was not a rule of thumb to live by.

Why you shouldn’t walk

There are plenty of reasons to stay put. To start, walking away will devastate your credit ratings, making it more expensive in the future to buy again. It will likely cost you more to rent because a landlord will check your rating and may demand a larger security deposit and perhaps higher rent to ensure you won’t abandon your lease.

Walking when you are in the financial position to pay your mortgage is not right or wise. You don’t get a free pass to indignation if you can afford your mortgage but you want to split because the value is down. If you do this for that reason alone, you’re not a sucker. You’re foolish.

Here’s another question from the same online discussion about moving from two incomes to one.

“I am quitting my $100,000-a-year job to stay at home with my 2-year-old and twins, who will be born this spring,” the reader wrote. “We have no debt besides our mortgage (about $2,000 a month). My husband also makes $100,000 a year. However, I am frightened about what this will do to us. We don’t spend frivolously, but we don’t pinch pennies either. We have about $50,000 in savings, but plan to use some of that to buy a bigger car that will accommodate three (children’s) car seats. How can we plan now so we’re not struggling later?”

Looking to the future

I have one word that will help anybody at any income level. Budget.

This couple should start now living on that one income. They should look for every place they can cut — cable, cell phone plans, eating out, insurance, etc. When they remove expenses for child care, commuting costs and other expenses with working full time — including eating out because one or both spouses are too tired to cook — they may find they won’t have to reduce their standard of living that much.

This couple has put themselves in a good position by buying a home with a monthly mortgage they can afford on one income. That’s huge and will help them now that the wife wants to stay home. And I agree about paying cash for the car. In fact, I would look for a late-model reliable used car instead of buying a new one. Yes, that will deplete their emergency money. But with one income, they shouldn’t add any debt if they can help it.

The housing meltdown reaffirmed what many people should have known before buying a home. Your primary home is not just an investment. It’s first a place to live. So buy what you can afford for the long term.

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