View Full Version : To Pay off the Mortgage or Not
For the smarter financial folks than me, here is a question.
My husband and I have a home appraised at approx $300K, with a $208K mortgage. If I were to increase our mortgage payments by a hefty amount, and the only thing I would have to do is stop paying into my TSP, leaving my IRA and Mutual Funds as they are, I could pay off our mortgage by the time I retire in 4 years.
Is it better to pay off the mortgage (5.25% loan) or is it better to take that extra money and dump it into my TSP, as well as increase the amount going into my mutual fund.
The home is our only debt. No car payments, no credit card payments, and kids college is already accounted for in our GI Bill.
GratefulCitizen
03-22-2010, 14:16
If it were me, I'd sell, even at a loss.
Rent while the housing market declines.
Buy again when the time is right.
Hypothetical example:
-Sell for $250-$300K
-Rent for 1-4 years
-Buy "retirement home" at $150-200k
It all depends on what you think will happen to housing values where you plant to retire.
If it were me, I'd sell, even at a loss.
Rent while the housing market declines.
Buy again when the time is right.
Hypothetical example:
-Sell for $250-$300K
-Rent for 1-4 years
-Buy "retirement home" at $150-200k
It all depends on what you think will happen to housing values where you plant to retire.
This is the house we plan to retire in. Our market has remained relatively stable during the housing crisis, and I can't see us being able to buy the house back cheaper than what we owe right now.
BrainStorm
03-22-2010, 14:19
I'm not a certified financial planner, so my advice should be suspect.
I am in a similar situation and spoke with my financial planner who also takes care of most of my investments. She suggested I look at the value of the interest deduction in my taxes in considering my decision. She also felt that she would be able to produce results higher than the mortgage interest rate so excess funds could go into earning that return.
YMMV
ZonieDiver
03-22-2010, 14:39
I am no financial genius - in fact, I am a financial dolt. (You would probably be wise to do just the opposite of what I suggest. <g>) However, I did sleep in a Holiday Inn Express for my week in Colorado Springs, so...
I'd pay off the house more quickly. Tax deduction is just that. True, you will have less retirement income due to less in TSP, etc. but, you will need less income with NO house payment.
GratefulCitizen
03-22-2010, 14:46
This is the house we plan to retire in. Our market has remained relatively stable during the housing crisis, and I can't see us being able to buy the house back cheaper than what we owe right now.
Fair enough.
(Though the important numbers on the sell/rebuy are the difference between sale price and buy price, not on how much is owed vs rebuy)
***********
***********
If you don't pay it off:
"Expense"
-the amount you pay in interest
"Profit"
-the amount you get in tax deduction on the interest
-the amount you can net profit if the money from principal and interest were used somewhere else
(expected rate of return, future taxes and inflation are among the things which will affect this)
If you do pay it off:
"Expense"
-the amount you lose in tax deductions
"Profit"
-the amount you don't pay in interest
(this is a "guaranteed" rate of return)
Comes down to future economic expectations and risk tolerance.
The home is our only debt. No car payments, no credit card payments, and kids college is already accounted for in our GI Bill.
I look at it this way:
If your retirement funds have a higher rate of return than the 5.5% house mortgage, you're ahead by not paying it off.
Remember to factor in the federal tax rebate from mortgage interest and the taxes due on your dividends and capital gains.
I am not a schooled investor, but with a little reading, I manage to consistently beat the market and exceed my mortgage rate.
That includes many many years where I only invested in mutual funds. I let them do their dirty deeds, earn their million dollar bonuses, and reaped the benefits.
If you are lucky enough to have a bean-counter in the family, put him/her to work.
My $00.0002
Good Luck..
Anevolution
03-22-2010, 15:26
The standard line is to never never pay your mortgage off early in exchange for sacrificing cash into retirement funds and/or paying off credit card debt. The reason for that is that mortgage interest is tax deductible, and even though it's tempting to be completely debt-free, you'll need every penny in those IRAs when it's time to retire. [/URL]
Afchic:
This.
But if it really is something you want to do why not just go biweekly with you payments? It will take a lot of time of your mortgage, because you will be paying less interest. It shouldn't cost anything just make the call to you bank. Or you could start makeing some principal only payments with any "extra cash" you have. That way if something came up and you needed that money you don't "have to" pay more if you don't want to. I like to leave my options open. My .02
V/r
Anevolution
For the smarter financial folks than me, here is a question.
My husband and I have a home appraised at approx $300K, with a $208K mortgage. If I were to increase our mortgage payments by a hefty amount, and the only thing I would have to do is stop paying into my TSP, leaving my IRA and Mutual Funds as they are, I could pay off our mortgage by the time I retire in 4 years.
Is it better to pay off the mortgage (5.25% loan) or is it better to take that extra money and dump it into my TSP, as well as increase the amount going into my mutual fund.
The home is our only debt. No car payments, no credit card payments, and kids college is already accounted for in our GI Bill.
Keep it as simple and focused as possible with the least amount of risk. This plan is based on what I'm currently doing and is from Dave Ramsey. Too many people want to offer advice, but admit they aren't financial geniuses!
Emergency Fund: If you don't already have it, get 3-6 months of basic living expenses in an emergency fund before you do anything. If your already there great!
Retirement Investing - Continue to invest where you get a match first (i.e. TSP 5%), but no more than 15% of your wages. Make sure your TSP is where it should be; i.e. 60% in C-Fund, 20% in S-Fund, and 20% in I-fund. This breakdown is straight from an article that Dave Ramsey did and shows long-term that it's the right percentages/funds.
Paying off the mortgage - Dump anything and everything else you can into the mortgage to pay it off ASAP. Stay focused on the goal; retiring in 4-5 years and having your retirement home completely paid for will be sweet!
No chances and easy to follow plan!
Roguish Lawyer
03-22-2010, 17:05
This is the house we plan to retire in. Our market has remained relatively stable during the housing crisis, and I can't see us being able to buy the house back cheaper than what we owe right now.
I am not in the investment business, but I represent lots of people who are. They tell me stuff. Lots of people think that we are soon going to see significant increases in inflation and interest rates. If that prediction is accurate, one reasonable strategy would be to invest in hard assets -- things that will have value for you regardless of what a dollar is worth. Based on what you say above, if I were you, I would pay down the mortgage. A home, if you plan to stay in it long-term, is one of the best hard assets you can buy.
Just my .02, YMMV. And, of course, I disclaim all warranties. :)
What a great question. Obviously there are a lot of factors to consider. The link below discusses the Obama administration's plan to limit the deduction of home mortgage interest for wealthier Americans. Even if they do not eliminate the home mortgage deduction, it's important to remember, you only receive the tax rate benefit for a deduction. If you are in a marginal fed and state tax rate of let's say, 40%, you are still losing 60% of your interest. It's important to note that large mortgages were in vogue during the Carter era as the highest marginal tax rate was in the 70% range. With this kind of tax rate, you would save 70% of every dollar of deduction. Credit card interest was also deductible then.
Also, if you or you husband are going to be deployed during the next four years, you may not need the deduction as badly as some and the tax benefit of mortgage payments is severely reduced in this case.
Finally, I believe you need to also consider utils. Utils are the measurement of enjoyment or comfort. It may be an aspect of your personality that you would feel better if your mortgage was paid off or in other words, for you there may be a high degree of utility in paying off your mortgage. If that's true, this may be the right plan for you.
Also, you can always refinance at a future date. I believe 40% of all Americans do not have a mortgage, so, if you do pay it off, you're not alone.
http://money.cnn.com/2009/02/27/real_estate/mortgage_interest_deduction_slashed/
Keep it as simple and focused as possible with the least amount of risk. This plan is based on what I'm currently doing and is from Dave Ramsey. Too many people want to offer advice, but admit they aren't financial geniuses!
I love the Dave Ramsey plan! His books and DVD's made things so simple to understand. I give his plan to all of my friends and was going to add it here until Dan beat me to it.
I am still a long way from real retirement, but I hope to shorten that time as much as possible.
Surf n Turf
03-22-2010, 19:24
afchic,
We were in a similar situation 10 years ago. We decided to pay off the mortgage, and currently have no debt. About 5 years ago, I was involved in an accident that caused early retirement – I am thankful that we paid of the house.
Since your house is the one you will retire in, it seems to me that it is more of a “comfort” decision rather than financial. Lets face it, even the best of investors are making single digit returns, so the question is not “where do I get the most return”, but how would you feel to be debt free going into retirement (or another career).
BTW, Roguish Lawyer is correct. Hard times, and inflation, are coming.
Ensure that the bulk of your money is “hard assets”.
SnT
Lots of people think that we are soon going to see significant increases in inflation and interest rates. If that prediction is accurate, one reasonable strategy would be to invest in hard assets -- things that will have value for you regardless of what a dollar is worth. Based on what you say above, if I were you, I would pay down the mortgage. A home, if you plan to stay in it long-term, is one of the best hard assets you can buy.
Thank you all for the input. It certainly has been helpful, especially the advice from folks that have thought about doing the same thing I am.
I talked to my brother yesterday who is in finance, and he told me that as long as I am keeping some money going towards investments, and can afford to put extra money each month towards principle, that paying off the house is a good idea. Keeping the same mortgage, will allow me to choose month to month if I want to put extra money towards principle. That way if something comes up out of the blue that month, that our current 6 months worth of savings can't handle (don't see that kind of a scenario happening) then I can choose not to put the extra in that month.
He also said that if inflation starts to creep up, putting our money someplace other than a 5.25% loan will be in our best interests.
I guess that I am lucky that I am in a position where I have the opportunity to decide what is the best means to ensure we are taken care of in our old age, without "having" to do anything other than make our normal mortgage payment.
I talk to my kids about this alot, and hopefully they are becoming more aware of money issues, and how spending/savings habits begin at their age, not at our age.
rltipton
03-23-2010, 20:46
My mom is in a very similar situation as you. The advice she got was to stop making payments for a few months until the mortgage company comes to the table, then talk them into reducing the amount you owe. The savings are worth the credit hit if the mortgage company writes off 1/3 of your principle. There is no 1099 involved since the mortgage company agrees to it, so it is simply a free-to-you reduction in the amount you owe.
If you don't have any other debt and are not planning on buying a new house anyway, what do you need a good credit score for? My spider sense tells me that when all the dust settles from the current financial situation in the US a credit score won't mean jack anyway.
I have had a house on the market for almost 2 years now and only had a couple of bites, neither of which were able to secure a loan. I made my last payment on that house last month based on the advice my mom got, in hopes that my mortgage company will make a deal. I tried calling them to negotiate while my payments were up to date and they said hell no. So I will try again after a couple of months of not paying and see if they will negotiate.
This goes against my grain in a big way. I was taught to always pay my bills on time and fulfill my responsibilities, so stopping the payments hurts a little inside, but knowing my mortgage company falls under the AIG umbrella helps ease the sting some.
I am living in my dream home now and don't plan to ever move again. We have no debt other than our mortgages and aren't planning on financing anything ever again, so...ain't got no use for credit anyway. :p
Anyway, good luck!!!
First, a question - what investment offers a yield of 5.25% guaranteed? None that I know of. So reducing the mortgage is analogous to buying an investment with a superior yield. Paying off your mortgage cuts your fixed expense, and that has its advantages.
Mortgage default has its advantages. It can help those who have properties with big declines. In some instances, mortgages that have been integrated into a security do not include the necessary paperwork - which means that the debtor can remain in the house for years without making any payments. There is precedent in Florida, as I recall. It is important to make sure that the state is a non-recourse state. In some states, the lender can sue for any deficiency. I'm not sure that a default looks good for those who have or wish to maintain clearance - though that is out of my lane. I would be hesitant to do a default in most instances, but that's just a personal view.
Investments in other vehicles implies an expectation that the yield will exceed the 5.25% on the mortgage after taxes. Please consider this from the WSJ:
In nearly 200 years of recorded stock-market history, no calendar decade has seen such a dismal performance as the 2000s.
Investors would have been better off investing in pretty much anything else, from bonds to gold or even just stuffing money under a mattress. Since the end of 1999, stocks traded on the New York Stock Exchange have lost an average of 0.5% a year thanks to the twin bear markets this decade.
LINK (http://online.wsj.com/article/SB10001424052748704786204574607993448916718.html)
Some argue for inflation - and I agree that we will see it eventually. However, oddly enough, the liquidation of debts can reduce the money supply. More problematic is that banks are hesitant to lend, and capable borrowers avoid new debt - these tend to reduce the velocity of money. So we could see an extended period of deflation. But deflation is the worst possible scenario for any debtor, because the load of debt gets steadily worse. Each dollar in hand becomes more precious.
On the other hand...a house is not liquid, so should one ever want to move quickly, getting money out of the property would not be easy. In addition, I am under the impression that Illinois does not have a very strong homestead exemption - in Texas, it is well-nigh impossible for anyone other than the IRS to seize one's homestead.
Still, with those caveats in mind, I suspect paying off the mortgage will have the best outcome.
My mom is in a very similar situation as you. The advice she got was to stop making payments for a few months until the mortgage company comes to the table, then talk them into reducing the amount you owe. The savings are worth the credit hit if the mortgage company writes off 1/3 of your principle. There is no 1099 involved since the mortgage company agrees to it, so it is simply a free-to-you reduction in the amount you owe.
If you don't have any other debt and are not planning on buying a new house anyway, what do you need a good credit score for? My spider sense tells me that when all the dust settles from the current financial situation in the US a credit score won't mean jack anyway.
I have had a house on the market for almost 2 years now and only had a couple of bites, neither of which were able to secure a loan. I made my last payment on that house last month based on the advice my mom got, in hopes that my mortgage company will make a deal. I tried calling them to negotiate while my payments were up to date and they said hell no. So I will try again after a couple of months of not paying and see if they will negotiate.
This goes against my grain in a big way. I was taught to always pay my bills on time and fulfill my responsibilities, so stopping the payments hurts a little inside, but knowing my mortgage company falls under the AIG umbrella helps ease the sting some.
I am living in my dream home now and don't plan to ever move again. We have no debt other than our mortgages and aren't planning on financing anything ever again, so...ain't got no use for credit anyway. :p
Anyway, good luck!!!
Why would I stop making payment on a loan, that I knew the terms of when I signed it? I am not looking at foreclosure, am more than able to make additional payments, so why should I expect that the mortgage company to take off any of the principle?
No offense to you or your mom, but I took on the responsibilty of a mortgage, and I intend on meeting my responsibility, and am not looking to decrease the amount of my loan.
Sacamuelas
03-24-2010, 08:21
I have to agree with AFchic on this one. That mindset is EXACTLY what is ruining this country. :(
FWIW - I've always been of the mindset that less debt is better and honoring one's accrued debts is a personal matter of making good on your word.
However - YMMV - and so it goes...
Richard's $.02 :munchin
BrainStorm
03-24-2010, 10:09
Situational Ethics should be an oxymoron.
greenberetTFS
03-24-2010, 10:17
I agree with Richard........... :) You made the debt,accepted it's interest rate,it's your responsibly to pay it...........:)
Big Teddy :munchin
The other irksome thing to me that seems to be gaining traction as someone else on here stated, is the commercials to reduce your IRS debt. Sorry jackass, I don't like the IRS anymore than you do, but why should I be paying the full amount of my taxes when you are able to settle yours for pennies on the dollar?
Just found out my husband's ex filed for bankrupcy (doesn't matter that we pay her almost $3K a month in alimony and child support but that is a topic for another day) so we have companies not only calling our house looking for her, they are calling MY PARENTS. My parents have never even met the woman, but somehow since my last name is the same as hers, and they are my parents they must know how to get in touch with her.....
To add fuel to the fire of taking responsibility for well, ones responsibilities, the ex has figured out child support stops in May when the daughter graduates from high school since we are taking on the full load of college costs. Since she is no longer recieving child support, she is kicking the daughter out of the house the day after graduation.
This is the type of person that is causing problems for the rest of us. Sense of entitlement for EVERYTHING, and no responsibilities for ones own actions.
greenberetTFS
03-24-2010, 11:01
The other irksome thing to me that seems to be gaining traction as someone else on here stated, is the commercials to reduce your IRS debt. Sorry jackass, I don't like the IRS anymore than you do, but why should I be paying the full amount of my taxes when you are able to settle yours for pennies on the dollar?
Just found out my husband's ex filed for bankruptcy (doesn't matter that we pay her almost $3K a month in alimony and child support but that is a topic for another day) so we have companies not only calling our house looking for her, they are calling MY PARENTS. My parents have never even met the woman, but somehow since my last name is the same as hers, and they are my parents they must know how to get in touch with her.....
To add fuel to the fire of taking responsibility for well, ones responsibilities, the ex has figured out child support stops in May when the daughter graduates from high school since we are taking on the full load of college costs. Since she is no longer recieving child support, she is kicking the daughter out of the house the day after graduation.
This is the type of person that is causing problems for the rest of us. Sense of entitlement for EVERYTHING, and no responsibilities for ones own actions.
afchic,
You right,it is a shit situation she's put you in,however I thought that once you file for bankruptcy they stopped calling people!!! :(
Big Teddy :munchin
ZonieDiver
03-24-2010, 12:28
I am living in my dream home now and don't plan to ever move again. We have no debt other than our mortgages and aren't planning on financing anything ever again, so...ain't got no use for credit anyway.
No offense to you or your mom, but I took on the responsibilty of a mortgage, and I intend on meeting my responsibility, and am not looking to decrease the amount of my loan.
I've always been of the mindset that less debt is better and honoring one's accrued debts is a personal matter of making good on your word.
You made the debt,accepted it's interest rate,it's your responsibly to pay it...........
Situational Ethics should be an oxymoron.
While this may be a bit of a thread hijack, the topic has been broached. In other threads on this site, the position that the USA is about to enter an "economic shitstorm" has been posited. IF I believe that to be true and imminent, would it not be in my best interests to pursue a course of action that would best prepare me to deal with such a calamity?
Theoretically:
My kids are grown and gone - at least one well-protected. I have no one around here to "worry" about save me. My homeowner expenses total around $1,000. a month - due to wise purchases of both home and mortgage. Due to the real estate situation in the Phoenix area as mentioned by TS (my area is even worse - 60-70% decrease), I find myself unable to sell my home at anything other than a huge loss.
Would I not best prepare to assist myself - and perhaps others - by stopping the payment of said homeowner expenses, and using the money to buy gold, silver, bullets, arms, or other survival items? I did not create the catastrophic economic situation that exists and/or is impending. I acted reasonably. I voted reasonably. Others drove us here - many profiting from it (then and still). Why should I put myself in a vulnerable position due to their fraud/incompetence/malfeasance when there is an alternative?
Just a thought... YMMV
The Reaper
03-24-2010, 12:37
While this may be a bit of a thread hijack, the topic has been broached. In other threads on this site, the position that the USA is about to enter an "economic shitstorm" has been posited. IF I believe that to be true and imminent, would it not be in my best interests to pursue a course of action that would best prepare me to deal with such a calamity?
Theoretically:
My kids are grown and gone - at least one well-protected. I have no one around here to "worry" about save me. My homeowner expenses total around $1,000. a month - due to wise purchases of both home and mortgage. Due to the real estate situation in the Phoenix area as mentioned by TS (my area is even worse - 60-70% decrease), I find myself unable to sell my home at anything other than a huge loss.
Would I not best prepare to assist myself - and perhaps others - by stopping the payment of said homeowner expenses, and using the money to buy gold, silver, bullets, arms, or other survival items? I did not create the catastrophic economic situation that exists and/or is impending. I acted reasonably. I voted reasonably. Others drove us here - many profiting from it (then and still). Why should I put myself in a vulnerable position due to their fraud/incompetence/malfeasance when there is an alternative?
Just a thought... YMMV
If everyone who is under water decided to pull the plug in the near future, that would probably be enough to break the system.
If very many people think that is the way to go, I hope that we are prepared for the consequences. I suspect that they will be severe.
TR
While this may be a bit of a thread hijack, the topic has been broached. In other threads on this site, the position that the USA is about to enter an "economic shitstorm" has been posited. IF I believe that to be true and imminent, would it not be in my best interests to pursue a course of action that would best prepare me to deal with such a calamity?
Theoretically:
My kids are grown and gone - at least one well-protected. I have no one around here to "worry" about save me. My homeowner expenses total around $1,000. a month - due to wise purchases of both home and mortgage. Due to the real estate situation in the Phoenix area as mentioned by TS (my area is even worse - 60-70% decrease), I find myself unable to sell my home at anything other than a huge loss.
Would I not best prepare to assist myself - and perhaps others - by stopping the payment of said homeowner expenses, and using the money to buy gold, silver, bullets, arms, or other survival items? I did not create the catastrophic economic situation that exists and/or is impending. I acted reasonably. I voted reasonably. Others drove us here - many profiting from it (then and still). Why should I put myself in a vulnerable position due to their fraud/incompetence/malfeasance when there is an alternative?
Just a thought... YMMV
You make some good arguments, but what it comes down to me is that I gave my word, through a signature on a contract, that I would act responsibly and pay off my debt as outlined in the contract. Just because other folks don't hold the same value as to "my word is my bond" as I do, does not mean that I should go back on my word.
Broaden the scope a bit. We all put our names on a contract to join the military. How do we feel about folks that try to get out of that contract because at this juncture in their life they feel it is in their "best interests" not to live up to the obligation of their contract? We all think they are dirtbags, how is this any different?
My word is my word. The world may be falling down around me, but if I gave you my word that I would do something, and it is still within my ability to do so, I will continue to act in an honorable manner and meet my obligations.
ZonieDiver
03-24-2010, 14:24
You make some good arguments, but what it comes down to me is that I gave my word, through a signature on a contract, that I would act responsibly and pay off my debt as outlined in the contract. Just because other folks don't hold the same value as to "my word is my bond" as I do, does not mean that I should go back on my word.
Broaden the scope a bit. We all put our names on a contract to join the military. How do we feel about folks that try to get out of that contract because at this juncture in their life they feel it is in their "best interests" not to live up to the obligation of their contract? We all think they are dirtbags, how is this any different?
My word is my word. The world may be falling down around me, but if I gave you my word that I would do something, and it is still within my ability to do so, I will continue to act in an honorable manner and meet my obligations.
All very true! I am not advocating, just "supposing"! A University of Arizona professor, Brent White, has some interesting views on this subject.
http://articles.latimes.com/2009/nov/29/business/la-fi-harney29-2009nov29
One of them is that if you go into foreclosure, you are NOT actually reneging on your contract, because it is PART of your contract that if you fail to pay, the bank takes back its property.
Secondly, he mentions that this is common business practice, even by banks. When an investment "goes south" - they walk away. Contract or no. (Just watch what happens in the coming commercial real estate debacle.)
On another note, SF works with indigenous personnel often. During the RVN-era (I won't speak to today), you had to have an "E and E" plan for the US personnel ONLY. In doing so, you would be leaving the indig behind - even though you kind of had a "contract" with them. It ain't pretty, but sometimes it is a "situational imperative"!
As there, one has to ask oneself - "What is your mission?" Is it to help the bank pad its financial balance sheet, when they don't give a rat's rear about yours? Or is it to do what is best for you and your family?
Just askin...
All very true! I am not advocating, just "supposing"! A University of Arizona professor, Brent White, has some interesting views on this subject.
http://articles.latimes.com/2009/nov/29/business/la-fi-harney29-2009nov29
One of them is that if you go into foreclosure, you are NOT actually reneging on your contract, because it is PART of your contract that if you fail to pay, the bank takes back its property.
Secondly, he mentions that this is common business practice, even by banks. When an investment "goes south" - they walk away. Contract or no. (Just watch what happens in the coming commercial real estate debacle.)
On another note, SF works with indigenous personnel often. During the RVN-era (I won't speak to today), you had to have an "E and E" plan for the US personnel ONLY. In doing so, you would be leaving the indig behind - even though you kind of had a "contract" with them. It ain't pretty, but sometimes it is a "situational imperative"!
As there, one has to ask oneself - "What is your mission?" Is it to help the bank pad its financial balance sheet, when they don't give a rat's rear about yours? Or is it to do what is best for you and your family?
Just askin...
So as TR asks, what happens when every American who holds a mortgage makes the same decision, to just walk away.... Think things are bad now, you ain't see nothing yet.
At some point we all have to face the fact that it maybe not best to just look out for our own individual interests. That what we do has an effect on others. Don't we all decry the Congressmen that act only in a manner that is beneficial to their own constituents, and puts the rest of the nation on the short end of the stick? Sure walking away may benefit me and my immediate family, but what does it do to my aunt, my brother, my sister, my cousin, my best friend? What if my single act precipitates their downfall as well, albeit, not my intention?
ZonieDiver
03-24-2010, 14:39
So as TR asks, what happens when every American who holds a mortgage makes the same decision, to just walk away.... Think things are bad now, you ain't see nothing yet.
Remember, my initial post was based on the position - as has been advanced by many here - that the economic meltdown is already on the way. Once that starts, personally, I won't care a whole bunch about someone else's property values.
MAYbe if more people started walking away, banks and mortgage institutions would be more willing to re-negotiate loans and buy-down principal on the home values that were artificially inflated by the oft-times fraudulent actions of said banks and mortgage companies. (They massively profited then, and want to profit again.)
I'll believe the US government is serious about this real estate crisis, which has been shuttled to the back pages by health care, etc. when I see that Angelo Mozilo (have you heard HIS name lately) has been given a 20-25 year sentence for fraud, and that Chris Dodd will be his cellmate!
99meters
03-24-2010, 15:24
One of them is that if you go into foreclosure, you are NOT actually reneging on your contract, because it is PART of your contract that if you fail to pay, the bank takes back its property.
This is true.....the banks understood this and decided to take on the risk. One of the ways they kept you in the game was having you come up with a 20% down-payment.... if they did'nt, it's on them. They also cover their a$$es by putting 90% of your payments towards interest the first 29 years of a 30 year mortgage (slight exaggeration).
If they did things right, they can break even or ahead. Finding a new place to live should be your only worry.
When it comes to walking away from a mortgage, we might consider the environment in which it occurs.
Over the years, large corporations, wealthy individuals, and even governments have defaulted on obligations. The business news is full of corporate bankruptcies, "workouts", and other behavior that boils down to a simple reality - the leadership of an organization promised to do something, and then didn't do it.
More recently, we see that GM, AIG, CountryWide Mortgage, and a host of other companies have defaulted. In some cases - CountryWide comes to mind - there appears to be an element of calculated, planned, intentional fraud. I note that there is a dearth of prosecution for actions that have cost uncounted billions.
Together, these actions have been called "Moral Hazard". When the economic elites demonstrate that one's word doesn't mean anything, then its only a matter of time until the rest of the society follows the same model. And now, its starting to.
TR points out that this may break the system with severe consequences - and I agree. My only small quibble regards timing - I think we crossed the event horizon years ago. Believing that, I suspect that ZD's scenario is a certainty, with the timing of the event remaining an open question.
I can respect, and even admire, those who say that their word is their bond and mean it. Its one of the values (and behaviors) that made America great. With regret, I question whether that value - and many others - still predominate. I fear they do not.
The business decisions made by the CEOs and other policy makers cast a shadow. If one can do a corporate raid, loot the pension fund, cheat the creditors and the shareholders - and get lionized as a sharp businessperson - I find it impossible to criticize the individual who believed that houses would always go up and that refinancing would always be available. If a "quant" can design notional securities according to complex, proprietary statistical models, then sell those securities with a prospectus that runs to 100,000 pages (yes, one hundred thousand pages) to unsophisticated pension fund managers around the world, all under a AAA rating assigned by a rating agency without any independent oversight - then I cannot see how it is so wrong for a couple to avoid some of the negative consequences of a wrong move. That couple lacks the information, the training, and the resources available to the folks who have created the present crisis - yet we are supposed to hold them to a higher standard?
No offense meant, but this path was chosen decades ago. Take a look at Chainsaw Al - LINK (http://en.wikipedia.org/wiki/Albert_J._Dunlap)
And we can look higher still. For decade after decade, we have been told that Social Security was safe - even though the numbers showed it was not.
Consequences? Yes, indeed. There will be nasty consequences. But the fight to prevent those was lost long ago.
I have a great deal of respect for the members of this board, particularly those who by their oath and blood defend the Constitution, which is the basis for our freedoms. I also agree adversity reveals character, the AIG's of the world are crooks, and there are tough economic times ahead.
The question I have, and which the politicians of both parties dodge constantly is when did the American Dream become the American Entitlement? Money is simply a tool and not the measure of a man. What is the shame in owning a home within your means or just renting? However, specifically when has a bank ever held a gun to someone's head to buy a house they couldn't afford? If someone makes $50k a year, they know they can't afford a $600k house, they are equally culpable as the unscrupulous lender for their greed. Central California is a ghost town of houses from this scenario.
I understand only a fool plays straight when everyone else at the poker table is cheating, but we are not at that point, it might get rough, economies expand and contract, we had a credit bubble where money was too cheap, it will likely be too rich for a while which slows growth. Take US GDP as the scale, in the Great Depression it was down 50%, through the recent crisis it was net down 5-6%, still a tough period , it might still get worse, but lets keep things in perspective. If the S&P needs to go back to test the March 2009 lows to reflect correct valuations, it will be painful, but we survived, and thats just part of an efficient market.
It's like a county lowering the highway speed limit from 55 to 35 after a big accident, an overreaction but will correct in time.
If it gets to the point as a nation beyond Depression levels (which America survived) where it's every man for himself, whether or not you paid your mortgage will be moot, (though enough folks shirking doesn't help) what will matter is luck and preparation in terms of exfil/survival threads folks here have been kind enough to share.
If someone makes $50k a year, they know they can't afford a $600k house
Do they? Seriously, do they?
Let's suppose...just for discussion...that we believe that houses will appreciate at around 8% per year. We see that it has happened for years, and the real estate agent tells us it will continue. The loan officer nods and agrees. Our neighbors do, too.
The loan? We get a NINJA loan (No Income, No Job, No Assets) - they don't even ask for such things. We get a negative amortization loan - so we pay a mere 1% interest, and add the difference (4% or so) to the mortgage balance. Of course we put nothing down!
The payments? At 1%, it's only about $500 per month. Our $50K buyer can make those payments easily enough. Better still, we're assured by the real estate agent and the loan broker (who got paid nice commissions on the transaction) that we can always refinance later.
Now if - a very big if - our underlying assumption is valid, then the house will increase by 8% per year, but our mortgage balance will increase by 4%. We have a net gain of 4% per year - we make $24,000 per year, all on borrowed money. What could possibly go wrong? :munchin
Now we're smart. We understand that exponential growth is inherently unsustainable, and that distortions of prices - even in housing - must revert to the mean. But - half the population is, by definition, below average intelligence. Will they understand? I doubt it.
So long as we're speaking of responsibility, what of the various professionals - often very well paid - who facilitated all this? Who profited from it?
Do they? Seriously, do they?
Let's suppose...just for discussion...that we believe that houses will appreciate at around 8% per year. We see that it has happened for years, and the real estate agent tells us it will continue. The loan officer nods and agrees. Our neighbors do, too.
NMAP,
As you know belief in guaranteed profits is a ticket to the big house, ( unless you are the Chinese government.) Your point reminds me of a crude joke I think most average Americans would get.
" A handsome but poor young man comes across a gnarled old lady who informs him she is a witch, and will grant him a wish if he takes her to bed. Afterwords when he wishes for fortune, she replies, young fellow aren't you a bit too old to still believe in witches?"
Respectfully, we all know ignorance is not a defense.
If I chose to do what some in this forum have suggested, my father would come back from the grave to kick my a** and disinherit me. I would do the same if any of my 3 sons told me they were considering such a course of action.
Call me old fashioned but "I yam whut I yam and thas all that I yam"...however, YMMV...and so it goes...
Richard's $.02 :munchin
Integrity issues aside, there is one other consequence of walking away from debt that I haven't seen mentioned.
Not every debt holder is just going to shrug their shoulders and let you off, "reduce your principal", or scar your credit. Many will take you through the proper court channels and get a judgment against you. How would you like explaining to your employer why your wages are being garnished? How would you like it when a LEO shows up at your moms house to server her papers and all the neighbors see?
afchic, according to the Fair Debt Collection Practices Act, if you tell a collector not to call and they continue then you can report them.
http://www.privacyrights.org/fs/fs27-debtcoll.htm