One of the most controversial topics in today’s economy is foreclosure. For many consumers, deciding what to do once payments get behind is an agonizing choice. Do you try to work a deal out with the lender or simply let the house go and live rent-free for a year or more?
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In some counties of the hardest hit markets such as South Florida and California, the foreclosure process can take years while homeowners live in limbo both emotionally and financially. Why is the decision so hard to let a home go?
I do not understand this train of thought logically. If you are really upside down on your home and behind on your mortgage, all roads to a new home loan are quite unlikely due to the recent damage of your credit score and loan modifications only help short term. They rarely reduce the amount of money you owe – just how you pay it.
If the impact of falling baseball card values contributed as much damage to the U.S. economy as mortgages have, people would simply leave their baseball cards on the side of the road and move on. But when it comes to defaulting on a mortgage, is it unethical?
Ethics are Subjective
How is defaulting on a mortgage any different than letting a credit card go or defaulting on a student loan? A lot of consumers come across hard times and no judgment is made by the masses about how unethical the decision was to have an account go to collections and settle. In fact, student loan and credit card companies know this risk and it’s one of the reasons why they charge 20 percent interest or more. It’s simply a numbers game for a bank but for a homeowner… how dare you!
Isn’t the job of every man and women to protect the financial status of their family and do what is best for their own home? Is this selfish? Of course, but it’s also how we are all built and human nature is far from perfect. Thankfully, the desire to protect a family’s finances are much less selfish than the profit-churning banks who want to charge $3 for a $20 ATM withdrawal. Many people seem to forget how consumers get abused every day by banks and accept it just as business – never questioning how ethical it is.
What about insurance companies and local state agencies who want to raise property taxes and insurance? Where does it all stop?
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Renting is a Pretty Good Alternative Short Term Solution
Let’s say you purchased a home using 100 percent financing for $600,000 in Miami a couple years ago where property taxes are around 2 percent of your home value and another 1 percent or more for insurance.
The same house today is worth somewhere around $350,000 and you are probably $200,000 or more upside down. The cost of carrying your current $600,000 mortgage is:
• Property Taxes at 2 percent of home value = $7,000
• Home Insurance of 1 percent - $3,500
• Maintenance (at $500 a month) = $6,000
• Annual Mortgage Interest (at 6%) = $30,000 +
So, before you pay any thing towards the principal of your house, your monthly nut just to enjoy the title of “homeowner” is $46,000 or more.
Sure, there is a huge tax benefit of home ownership, but if you are essentially spending $46,000 a year on interest and other fees. Why would you want to continue to pay a $600,000 mortgage when the house is only worth $350,000?
Many people enjoy the year or two or three it takes to foreclose saving money from free rent and socking it away. In two or three years these people will have almost $100,000 cash and (if done right) no liability from having a house underwater.
Ethical or not – their families will live a comfortable life while others continue to scratch their head. Is there a mortgage calculator to figure this out? Not really, but some common sense can sure help. The NET cost of renting vs. owning can be calculated for many by this simple formula:
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Step 1 – Calculate Total Cost of NON-Principal Payments
Total the cost of any items which do not go directly to paying down the prinicpal mortgae balance and would not be required if you rented a home such as:
• Property Taxes
• Homeowners Insurance
• Mortgage Interest
Basically all the money you have to spend before actually paying down your mortgage.
Step 2 – Learn about Renting.
Determine the cost of renting a comparable home that suits your family lifestyle.
Step 3 – Calculate the Difference Calculate the difference between Step 1 and 2.
If your fees of owning a home are $4,000 a month (when you include interest) but you can rent a comparable house for $2,500 a month then seriously, why are you sticking around a sinking ship?
A $1,500 difference can quickly add up when you sock it away and in a year or two from now have a down payment for another house without all the negative equity. (Not to mention the money saved from a year or so free rent that comes with not paying a mortgage)
Honestly, I don’t get it. Sure, there are tax advantages to owning a home and possible legal and financial responsibilities from a foreclosure but most consumers can let a mortgage go with NO LIABILITY using the right steps.
Additionally, any tax advantages are not so big to make any real difference when a person is hundreds of thousands of dollars upside down on a mortgage so this argument does not carry a lot of weight either.
Most lenders are waiving any kind of liability should you short sale a home, courts are so busy a foreclosure can take years to happen (free rent) and many real estate experts predict the housing market will suffer for years and the odds of ever getting your home back to 2005 to 2006 values is quite likely a decade or more away, if ever.
Additionally, deals are everywhere and in many areas some of your neighbors most likely just bought a comparable house for one-third of what you paid. What shame is there in taking advantage of the system when the banks did the same thing with the bailouts, a lender is more than willing to short sale a home to someone else instead of giving the current homeowner a break or how counties are now raising your property taxes because they need the money? It’s ok for all the corporations and government to do “unethical acts” but individuals need to feel shame?
I’m confused... Who told us letting a house go was unethical? Oh yes, the banks.
Alan Dunn is a serial entrepreneur and publisher of various consumer education websites, including a site with tips on how to save money and a destination for drivers with a wealth of information on car insurance companies to help people understand the details of auto insurance coverage.