Think before walking away from mortgage

I’m increasingly getting questions from homeowners who can afford their monthly mortgage payment, have no reason or plans to move, and yet they wonder if they should walk away from their home because the value has dropped.

During a recent online discussion, one reader who identified herself as “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-rate mortgage of 6.125 percent.

Her house is now worth about $350,000.

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

There may be gaps that Florida Chick didn’t fill, but if she has to use her savings to pay her mortgage, she already was in trouble long before the housing bubble burst.

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

This walkaway strategy is relevant only if you can’t pay the mortgage.

The 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 — and is — not a rule of thumb you can live by.

There are plenty of reasons to stay put. To start, walking away will devastate your credit rating, 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 even 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 simply 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?”

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, if they haven’t already, look for every single place they can cut — cable, cell phone plans, eating out, insurance, etc. Additionally, when they remove expenses for child care, commuting costs and all the other expenses that go along with working full time — including more 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 by 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 a huge plus 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, paying cash for the car will deplete their emergency money. But with one income, they shouldn’t add any debt if they can help it.

There is a lesson to learn from both these readers’ lives.

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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