Property Foreclosure

[tonkatruckjk]

I'm prepared for the "You're a drain on society" type responses. Save yourself the time, I get that.

That said, I'm interested in folks' thoughts on a past decision that was less than financially sound.

I bought a house about 3 years ago. Selling price was $175k. It's a nice house, I like it. It's my first. It's in a nice neighborhood.

Unfortunately, I bought in when folks were just starting to foreclose. The house is now worth $78k, according to Zillow.

I still owe $165k.

Is it financially sound to stay? To pay another dime into this black hole? The mortgage payment isn't high, I have a decent enough interest rate, and I can afford it. My question is SHOULD I?

Thanks in advance.

-Social Drain

[LuckyRobin]

Yes, you should stay. If it's a nice house and you like it and it's in a good neighborhood and you can afford it, why would you want to walk away? Why would you want to ruin your credit by doing a foreclosure? That is very financially unsound.

[bjl584]

Originally Posted by tonkatruckjk

I'm prepared for the "You're a drain on society" type responses. Save yourself the time, I get that.

That said, I'm interested in folks' thoughts on a past decision that was less than financially sound.

I bought a house about 3 years ago. Selling price was $175k. It's a nice house, I like it. It's my first. It's in a nice neighborhood.

Unfortunately, I bought in when folks were just starting to foreclose. The house is now worth $78k, according to Zillow.

I still owe $165k.

Is it financially sound to stay? To pay another dime into this black hole? The mortgage payment isn't high, I have a decent enough interest rate, and I can afford it. My question is SHOULD I?

Thanks in advance.

-Social Drain

I'm of the mindset that a primary residence really isn't an investment. It's a place to live. It drives me crazy when I see people on Suze Orman's show list all of their assets, and their house is the biggest one that they have. What good is it if your home is appraised at $350,000 and you plan to stay there until you die? Can you really count that $350,000 as part of your net worth? Only if you sell your house in my opinion? But then what? Where do you live at then? Can you really guarnatee that it will sell for $350,000? It sort of defeats the purpose of living there till you die doesn't it?

So the point is, if you like the house, and if you plan to stay there for a while, and you can afford it, then absolutely keep paying on it and stay there. Enjoy your house, live there, and ignore what the appraisals say. I question how accurate Zillow is anyway.

[rj.phila]

2 points:

1-Brian is right. the idea that RE valuation "by appraised value" works is outdated.

2-you arent detailing an alternative. "should i do x?" has to be measured in context. you have to live somewhere, whether it be on the street or in a home. detail your alternative, and you will probably get better advice.

[photo]

You shouldn't make a decision like this based on Zillow.

As RJ said, what alternative are you looking at? It will probably include a credit plummet, which then raises your car insurance premiums and will affect you in many other negative ways.

From what little you've said, though, your reaction is more of a perceived personal threat than a decision you really have to make. In a few years, the house value could be much different. And then you'd be left with bad credit and a huge missed opportunity, much like people who bail from their stocks the moment the stocks start a downward trend.

[BuckyBadger]

Do you need to sell your house right now? Are you moving? If not, why on earth would you consider walking away from your residence?

You have no problem with the house, you just have a perceived problem with the hypothetical value of your home. It's value hasn't changed to you -- it is the place where you live and you like it and you like the location. Why would you trash your credit and leave the house for no reason at all?

This would be like someone asking if they should abandon their car because it has a dent in it and it's not worth as much any more, even though it still runs fine.

[MonkeyMama]

Agreed with the others.

I do know people who ironically committed mortgage fraud in getting insane loans, and now suddenly are ethical and plan to stick it out. (A LOT Of people - they are all lacking in brains). Anyway. I am talking impossible mortgages of the "interest only" variety and the "I am upside down $300,000 so can never refi out of this." & of yeah -they make $75,000 per year incomes. Tell me how it's physically possible to clean up that mess without walking away. I'd be so long gone! (Though I believe some of this fraud should be punished, I don't think that financial ruin, for life, is necessarily a fair punishment. It's a little extreme, and I wish more people would wake up and walk away. Because they aren't helping anyone by sticking it out - if they just end up on welfare in the end).

Anyway, and then there are people with perfectly reasonable mortgages, who happen to be a wee bit upside down. So what? I'd stick it through. I didn't sign up for my mortgage for "only if my home stays worth more than I owe." I remember when we bought our home in 2001, ironically, that many felt the real estate run up was about over and that we were buying way too high. I remember thinking I could care less about the value of the home in the long run because it was a great deal. So, I think I could say with confidence, in your shoes, I could probably care less about the upside down situation. I would work on paying down the principal so that I wouldn't feel so *stuck.* But, other than that, it is what it is. No need to panic and run.

[Petunia 100]

I feel your pain, Tonkatruck. I am in a very similar situation. Thus far, I have stayed put. I do wonder from time to time if I am making a huge mistake. That's my biggest concern. Not my sunk costs (down payment, repairs), but whether or not I am making a poor choice moving forward.

I don't have any answers for myself, let alone for you. I wish you luck in whatever you decide.

[BuckyBadger]

Originally Posted by Petunia 100

Not my sunk costs (down payment, repairs)

If you aren't paying your mortgage you're going to be paying rent. If you can afford your house there is no reason to bail on it.

Maybe I'm missing something here? If you don't have to move and you like your house and you can afford your house, why do people want to just up and walk away from them? Makes no sense to me...

[Petunia 100]

Speaking only for myself, one reason to bail might be to buy a similar home for far less. Recently I wrote in my blog that if I were to buy a similar home and take a 15 year mortgage, I would have PI payments of $700 and some odd, with 15 years to go. Currently, I have PI payments over $1000 and have 26 years to go. That's a substantial difference, wouldn't you say?

To come up with another 20% + closing down, I would have to dig into my retirement funds a little. So its not a straight across comparison, there is nest egg damage involved. On the other hand, the new mortgage would free up money which could go towards repairing the nest egg damage.

[BuckyBadger]

But how easy it it going to be to get a good mortgage if you've just been forclosed on last month? You're going to have to pay rent for a significant amount of time before your credit recovers to the point where you can get a load at a "normal" rate.

[Petunia 100]

Oh, I would have to buy the new home first. I have already discussed the possibility with my lender (Wells Fargo). I was told that I qualify for a new mortgage of up to 100k while keeping my current home. I'm not certain how they came up with that, because that would be one tight budget. At any rate, since my home is currently worth about 125k, that would be enough to replace it. (Not to "move up", but to buy something similar.)

Certainly my flawless credit would be ruined. I'm not saying it would be all fun and games, there would definately be drawbacks. For the time being, I am doing nothing. I am keeping my eyes open though. If prices plunge further (as some are predicting), I may act.

Home values in my town have fallen 70% from the market peak. That's not a typo. Many people here are grappling with this very decision. I did not buy at the peak, so I am faring much better than some.

[BuckyBadger]

Okay, clearly I don't know anything about backrupty, but in order to keep the lender from coming after your assets for the unpaid portion of your first loan, wouldn't you have to declare bankruptcy? And in doing so wouldn't your assests, including your second home, be at risk?

[Petunia 100]

You raise a good point.

The answer is: it depends. I live in California, a non-recourse state. Generally, the only thing the lender can come after is the house. But the protection only applies to original purchase loans.

ETA: Refinances, second mortgages, and home equity loans tend to be recourse, even in non-recourse states.

Laws are different in recourse states. Tonkatruck, you should research whether or not your state is a recourse state before you make a decision. A quick Google search should provide the answer.

[Frugal]

I would always stay, no matter what, not only because it is the only right thing to do, but also because over time, the market could change and the property appreciate. It is always a "gamble" of sorts to take out a home loan, because we never know if we will be able to resell it for what we paid for it. It is a calculated risk that anyone having a loan takes.
There might be a way to rent the property if you can't sell it, but then, you would really have to talk to a real estate professional about the specifics of your situation.

[alphadore]

If I were you, I would stay. You say it is a nice house in a nice neighborhood.

[jasminhatcher]

If you like living there and you can afford it then you should stay. The property prices might go up, and even if they don't, its your home and you're comfortable in it.

[Snoopy2645]

I would stay property values will go up & they will go down like others have stated
you gotta live somewhere right & if you let it get forclosed there goes your credit which can be expensive too I know I have lived in my house for 12yrs I have seen the housing market go way up & go way down & back up one just never knows

[Eric80]

If you stay you have a nice house and you can afford it. If you sell you will still owe money on the property and have to find somewhere else to live and therefore will have to folk out two revenue steams and will waste more money into a different black hole. It is a recession at the moment and if you can ride it out then the value may increase in the future.

[PMMM]

Most of the data that I have seen indicates that it could be 10 to 15 years just to get even with the losses that the housing market has taken. Of course this is highly dependent on the geographical region of one's home.

In our state if you walk from your home the bank has no recourse except to take your home. In my neighborhood we probably have 150 homes and I bet at least 15 to 20 are siting empty. Some are divorce sales after the crises hit and they could not sell their homes. The vast majority are from walk aways due to price valuation decline.

Some of these people bought at the height of the boom. For instance a guy down the street paid $405K for a 2200 sq foot home. My home is the exact same house but with a lot that is about 2000 sq ft larger. I paid $242K for my house. He paid $405K. But now my house is valued by Zillow at $235,600 and his less than that. Luckily I still have equity in my house but I guarantee this guy does not. His house sits empty by the way. It's pretty disheartening to have owned a home for 8 years, I'm talking about mine now, and the value of the home is less than what I paid for it. And I bought before the horrific price increases.

I know another guy that bought a house about the same time that I did though his is a bit larger with a larger lot. He had a bogus type loan due to some credit issues when he bought. But in the effort to get out of that loan he took out another fixed rate 30 year loan but didn't read the fine print in his original loan and he had to pay a prepayment penalty plus he took some equity out of the house. He now owes $305K on a house he paid $265K for but is now only valued by Zillow at $256,300. His fault clearly and he knows it. But with a payment of $2300 per month and little or no chance of at least getting even for years and years, he's contemplating moving on. He can rent a place for $800 to $1000 less per month, he almost guaranteed to be able to stay in the house for a year without paying the mortgage and bank all that money. (He intends to pay debt off.) He's looking at it from a strictly business perspective. He views the home as an investment, the investment went bad. The bank says you pay me X per month or I take the house. He's saying hey the investment went bad so you can have the house. A business decision only.

Anyway, I just wanted to throw out there that there are many different situations that people go through. I really feel for the people that lose their homes because of job loss caused from by the recession. Me, I'm staying. My interest rate is 4.3% and I still enjoy some equity. Not a lot but I would pay the exact same amount I pay now to get the same size house in the rental market. I like my home and where I live although my wife want's a rambler. Good luck with that. It ain't going to happen. It's the fire sales in my neighborhood that is killing the values. My next door neighbor sold his house, which is the same size as mine for $205K. That kills your value.

Anyway, lots of tough situations out there and a lot of people are suffering. i just praise God I have a still have a job. (Our company was sold to a private equity firm 2 years ago.) I actually thought I would be history by now but so far I have managed to hang on. Luckily I have a couple years of living expense salted away. Most people do not and live paycheck to paycheck.

I have sympathy for those that lost homes through job loss. I have a tough time sticking up for those that made poor financial decisions or pulled all their equity out of their homes or just can't plain manage their money.