Home Underwater (my plan)

[Beamee42]

Currently, we owe 151,000 on a home that could sell for 120,000-125,000.
Our monthly payment is 930.00

I see all these people just leaving their homes, and wonder if I'm doing the right thing. The way I think is that I have to live somewhere, and if I rent an apartment big enough and in my area it's going to cost at least 900.00 a month. Since I'm going to be paying out pretty much what I pay for my mortgage anyway, why abandon my home and mortgage?

I have a five year plan of paying off the mortgage, which will save us 170,000 in interest. After which we will only have property tax an insurance to pay. We will own a fully paid house.

We had planned to live here for at least ten more years, if not the rest of our lives.

Is my plan way off the mark? Is it bad business?

[witchkizzle]

First I will say you made an agreement to purchase the house and you are morally obligated to pay your debt. It doesn't matter what happened to the value, it is your home and you are responsible for paying for the things you buy on credit.


Even other than that, though, if you plan on staying there for 5 years after you have paid it off then you would be saving (based on a very simple calculation that does not include things like property taxes you have to pay while living in a house vs not paying property taxes while you rent) about $55,800 over that five years, since you won't have a $930 a month payment.

I think it makes financial sense to pay it off and stay in it for a while. You never know if the home value will rise while you stay in it over the next 10 to 15 years.

You only lose money on the home if its value is below what you paid when you go to SELL it, which may or may not happen.

[Petunia 100]

Currently, we owe 151,000 on a home that could sell for 120,000-125,000.
Our monthly payment is 930.00

I see all these people just leaving their homes, and wonder if I'm doing the right thing. The way I think is that I have to live somewhere, and if I rent an apartment big enough and in my area it's going to cost at least 900.00 a month. Since I'm going to be paying out pretty much what I pay for my mortgage anyway, why abandon my home and mortgage?

I have a five year plan of paying off the mortgage, which will save us 170,000 in interest. After which we will only have property tax an insurance to pay. We will own a fully paid house.

We had planned to live here for at least ten more years, if not the rest of our lives.

Is my plan way off the mark? Is it bad business?

I've been through the exact same thing, so I feel your pain. I too wondered if I were making a large, foolish choice (to stay in my home and keep paying). Like you though, I didn't see that I would be any better off walking away and renting.

I think it is fabulous you have a plan to own your home free and clear in only 5 more years!

In short, no, I don't think your plan is off the mark.

[Beamee42]

Thanks for the replies. It just seems to me that the value of the house doesn't matter if you plan to stay awhile. If you buy a car on a loan, you don't walk away from it the minute the value goes down, which is right when you drive it off the lot. You plan to drive it for 5-10 years despite it being worth a sixth of what you paid for it when you bought it.

I don't think too many people with a mortgage ever really makes money on a home anyway, with all the interest you pay up front. One way to look at it is that once you're in the game, it's like paying your rent every month, and you get to live in a nice place. You have to pay the piper every month anyway. But not when I really own this place!

I'm thinking this is my home. My payment is the same as it was when we moved in, and we can still afford it. I'll be paying down the mortgage to below 120,000 next week. I can recast anytime, which will bring my monthly payment down to about 600.00 or so, if I need to. Plus, I don't want to be bothered with moving.

Plus, I could always rent out this place in the future as well.

Thanks, I just want to make sure I'm not missing something in my thinking.

[snafu]

Beamee: I think you've nailed it! You've bought a house to live in...it's not an investment like a Mutual Fund to be bought and sold on market value. If you stick to your plan and pay down the mortgage quickly, you will save yourself a huge amount of interest. In the first five years, nearly every dollar goes to interest and taxes if PIT.

A lot of people who abandoned their homes were not able to pay the monthly payment. They have also destroyed their credit rating for a long time. These days even employers are checking credit ratings so it can have bad results for getting new jobs. Anytime they apply for credit to buy a car or even stove, they will be paying very high interest rates, as much as double the lowest rates for example.

Enjoy your home and do your best to pay a bit extra directly to Principal. You didn't mention what interest rate you're paying, so it could be important to see if you can get a lower rate with little or no fees or transfer cost.

[JoeP]

You only lose money on the home if its value is below what you paid when you go to SELL it, which may or may not happen.

This is the truth. A lot can happen between now and then.

[Beamee42]

Beamee: I think you've nailed it! You've bought a house to live in...it's not an investment like a Mutual Fund to be bought and sold on market value. If you stick to your plan and pay down the mortgage quickly, you will save yourself a huge amount of interest. In the first five years, nearly every dollar goes to interest and taxes if PIT.

A lot of people who abandoned their homes were not able to pay the monthly payment. They have also destroyed their credit rating for a long time. These days even employers are checking credit ratings so it can have bad results for getting new jobs. Anytime they apply for credit to buy a car or even stove, they will be paying very high interest rates, as much as double the lowest rates for example.

Enjoy your home and do your best to pay a bit extra directly to Principal. You didn't mention what interest rate you're paying, so it could be important to see if you can get a lower rate with little or no fees or transfer cost.

5.5%

It's tough to get a refinance right now, even though we have impeccable credit (800+scores). We have to get the principal down to 96,000, if we don't want an exorbitant PMI tacked on. We'll refinance as soon as we hit the right numbers. If the value goes up (it's actually been going back up) enough, and we pay down enough, we'll hit the sweet spot before we know it. Hopefully, interest rates will be worth it by then.

In the meantime, pay it down and recast if we need a lower payment out of necessity.

I think in our case, the ol' "why pay rent, when you can own?" will actually be a good deal for us in the end. No rent or mortgage going into retirement is a good thing.

Thanks for your awesome reply.

[Petunia 100]

5.5%

It's tough to get a refinance right now, even though we have impeccable credit (800+scores). We have to get the principal down to 96,000, if we don't want an exorbitant PMI tacked on. We'll refinance as soon as we hit the right numbers. If the value goes up (it's actually been going back up) enough, and we pay down enough, we'll hit the sweet spot before we know it. Hopefully, interest rates will be worth it by then.

Are you ineligible for Harp? I was able to refi under Harp last June, and I am quite a bit more upside down than you are. I was able to get 4.125% with no fees. (All that was added to my loan balance was my new impound account and 30 days of interest. Both of which I got back via a refund of my old impound account and skipping one payment.) If I had been less than 125% LTV like you are, my rate would have been a bit better.

[ua_guy]

First I will say you made an agreement to purchase the house and you are morally obligated to pay your debt. It doesn't matter what happened to the value, it is your home and you are responsible for paying for the things you buy on credit.

No, there is no moral obligation. It is a contractual agreement and there are terms in that contract that start with "If you do not pay...", and those terms are outlined as well and what happens when you do not pay. Nowhere does it say it's wrong, or that the person is bad or wrong for walking away from the home. There are no moral agreements in the contract, and there were no moral requirements in order to sign that contract. Let's be clear about that.

Banks would love for you to think that there's some spiritual or moral tie to a home, and there simply isn't. You are an investment to the bank, Your money is an investment into your own future, and the home is simply a piece of collateral, and that. is. all.

In the OP's situation, it doesn't sound like there's any real need to leave, bail, move, walk away, etc.. The home is underwater but the living situation sounds desirable/tenable so the only worry is being underwater, which is only realized if the property is sold at a loss, as already stated. Don't sell the home if you don't have to or want to.

It is in good interest to pay off the mortgage early. Understand the penalties, if there are any. Also, take a good look at how a mortgage interest deduction may be helping in certain situations. Since I don't know the OP's total financial picture, it's hard to say, but there is a point at which a mortgage interest deduction could still be helpful. This would mean paying the home down to a certain level, but not completely off. Having a mortgage could also help for future credit needs. All that needs to be weighed against the OP's financial picture and other goals.

[JoeP]

Signing a contract makes it a legal obligation, meaning that both parties are bound by the terms, and either may incur a civil suit if the terms are broken. On this I agree.

For some of us, our signature means more than just entering into a contract; it is a commitment and promise to make the best possible effort on our end to fulfill our end of the deal. To intentionally put aside that promise and default on the terms that we signed, to me, is morally objectionable.

[maat55]

As fast as you intend to payoff your house, I doubt refying would be necessary. If you think there is a decent chance it may take longer, refying when the chance comes may make sense.

As for the moral issue, this bubble was caused by the government. I would not loose one minutes sleep worrying about walking away.

Your plan sounds just fine. In the big picture, you will have the house you want and have payed less than most pay paying full term, despite the governments socialist penalty.

[witchkizzle]

Morality not being a part of the contract is kind of the whole deal with morality. If you have to add it into a contract that "you now have a moral obligation" or whatever, then it is no longer a moral obligation, but a contractual one.

Morals are always in play, unless you just don't believe in morals. That, however, is a separate discussion.

Also, I agree with JoeP.

[ua_guy]

Morality not being a part of the contract is kind of the whole deal with morality. If you have to add it into a contract that "you now have a moral obligation" or whatever, then it is no longer a moral obligation, but a contractual one.

Morals are always in play, unless you just don't believe in morals. That, however, is a separate discussion.

Also, I agree with JoeP.

A legal obligation <> a moral obligation. And morality is not a staid concept. If we are questioning what is "the right thing to do", the answer changes between scenarios. There's a big difference between someone walking away from a home because they owe too much and can absolutely afford it, versus someone who walks away from a home in the interest of continued employment, or providing for their family because they lost a job.

Morality is a different discussion...probably not wholly appropriate for this specific thread, but I thought it should be said that there really is no moral obligation when it comes to mortgages. The secular Golden Rule is to treat others as they wish to be treated. When we look at what banks have done to undermine the housing market, it suddenly becomes clear that homeowners are erroneously held to a set of double standards when it comes to soft obligations like morality.

[witchkizzle]

A legal obligation <> a moral obligation. And morality is not a staid concept. If we are questioning what is "the right thing to do", the answer changes between scenarios. There's a big difference between someone walking away from a home because they owe too much and can absolutely afford it, versus someone who walks away from a home in the interest of continued employment, or providing for their family because they lost a job.

Morality is a different discussion...probably not wholly appropriate for this specific thread, but I thought it should be said that there really is no moral obligation when it comes to mortgages. The secular Golden Rule is to treat others as they wish to be treated. When we look at what banks have done to undermine the housing market, it suddenly becomes clear that homeowners are erroneously held to a set of double standards when it comes to soft obligations like morality.

I agree there is a big difference in the specific reasons for walking away from a home. What OP was stating was more inline with your first example under what is right and what is wrong. "I can afford to pay off this house relatively quickly, but am not sure I want to." Also, I agree morality is fluid, but I think it can be reasonably seen from the specific topic of this thread that we are talking about what is right and what is wrong in this case.

It just seems your opinion, and I am not trying to put words into your mouth or assume your take on this or anything like that, is that what the banks did was OK because they were just looking out for their financial interests since it is ok to walk away from your home when you are looking out for your own financial interests.

I'm just in the camp that thinks a house purchase is a risk and the purchaser bears the specific risk that the home will lose value. Picking the wrong house, basically, is not something I feel like is a good reason to shirk your agreements.

Obviously, these are just my opinions. I would also like to thank you for your civil tone. I don't often state my opinion in a thread because all too often forums have "internet fights" when two people don't agree. I do see your take on this and I do think I have softened my view on it a little due to your well thought out posts.