Does it make sense to remain underwater?
by Brian Turner
It's 2004, and you are planning to move up to buy your dream home. You and your husband each sold your home a few years back and you both made a good amount of money off the sale of both homes. You decided to rent for a few years to make sure you had enough money to make a significant down payment. It is now time to buy the home you will live in for the rest of your life.
You are a responsible buyer. Your credit scores are in the 800s because you've been disciplined. You have $250,000 saved in your bank accounts and you plan to put 20% down on the next home. You don't want to be one of those 100% financing buyers. You both make good money and are ready to take the plunge and buy your home.
You walk into the model and fall in love with the home. It's everything that you ever wanted. Granite, stainless steel, 2-story foyer, hardwood floors, a master bedroom to die for, finished basement with a theatre room, great neighborhood, excellent schools...the list goes on and on. This is it! You just had a baby and this will be the families stopping ground for the next 20-years.
So you buy the home for $600,000 in May 2004 at a low interest rate of 6%. To avoid PMI and get a lower payment, you do a conventional loan and make a down payment of $120,000 (20%). You pay about $25,000 in closing costs and your new mortgage is around $480,000. The $200,000 you had in savings is down to around $50,000. You were nervous about putting that much money down but you were told over and over again that real estate is the path to financial freedom. So you know over time you will be able to sell your home for more than what you bought it for and make a profit.
Life is great! You just bought your dream home and found out your neighbor bought a smaller version of your home 6-months later for $50,000 more. You checked out their home when they had their housewarming and realized that they didn't even have as many options as you selected, but paid $650,000 for their home. You were one of the first to buy in the community so with each sell the builders made, your property value was on the up, up, up! You both make good income so you are able to pay the mortgage with one check. The other check is used to pay bills and goes into savings.
Fast forward to 2010! You receive a 'Just Sold' card from the local real estate agent in your area, and the $700,000 home that your neighbor bought in May 2005 was foreclosed and recently sold for $350,000 in January. You saw this home and know it was bigger and better than yours. The lot was bigger and they purchased every upgrade imaginable. You then contact your real estate agent and ask for the current value of homes your neighborhood, and she comes back and gives you a report stating the average value is $340,000. You can't believe it so your get an appraisal done and it is confirmed.
You are pissed! Your 20-year investment seems like a distant memory. You owe $450,000 on a home that is now worth around $340,000. Although you are still making the mortgage payments, it's harder to do b/c the husband was downsized due to the recession and doesn't make as much. Instead of paying the mortgage with just your first check, you have to use some of the money from check #2. In addition, the savings that you had is diminished because when he didn't work for a few months, you had to dip into the 6-month emergency to stay current with the bills.
You are thinking to yourself, you did everything right so how did this happen? At this point you are trying to decide what to do. Homeowners are foreclosing in your neighborhood left and right. And with each new sale, the look and feel of the neighborhood changes. You do not feel as safe and at this point, you are trying to decide whether to continue with your 20-year investment. Between all the foreclosures and short sales, the values of the home may continue to go lower and lower.
You are responsible and decide you are not going anywhere. You believe that the people who were foreclosing and doing Short Sales were not responsible like you. You still have great credit, some savings, and you are not one to follow the crowd. Instead of applying for a Short Sale to sell your home, the decision is made to stick it out. You believe the that values will come back and you will regain your initial investment one day. So although you owe $450,000 and the values are in the $340,000 range and dropping, the decision is made to stick with the 20-year plan. You put a lot blood, sweat, tears and money into your home and want to get every penny back. You know that if you do a Short Sale
, the $120,000 investment you made in your home will be lost so that is not an option. You figure by 2020, things will be back to normal and your home would at least be worth the $600,000 you paid for it or more!
You decide to keep the house with the believe that real estate prices will make a comeback.
If you bought a home between 2004 - 2008, there is a good chance that you are upside down on your mortgage.
What if your home was never really worth the $600,000? If that's the case, it may not ever be worth that again, even in 20-years.
If you could buy your same home for half the price, would you do it?
Realize that the $120,000 down payment you made is long gone and you won't get that money back. Remember you made money when you sold your homes in the past so if you do sell, you are not walking way with nothing. YOU MADE MONEY ALREADY!!
Remember that if you are paying the mortgage on a property that is significantly underwater, you take the form of a renter. The longer you pay on a home that is no longer an asset, the tougher it becomes to make the mortgage payments. And once you build up this reluctance, you increase your chances of falling behind and possibly losing the home.
In order for you to get top dollar for your home, you need a BUYER. Understand that underwriting guidelines are tighter which makes getting a mortgage tougher. For example, FHA is implementing tougher down payment requirements: http://bit.ly/4CKHEI. THE POOL OF BUYERS IS MUCH SMALLER.
Loan Modifications are now working. The Obama administration is implementing a plan to incentivize banks to do Short Sales called HAFA: http://bit.ly/59Na3u
Consider doing a Short Sale! Downsize for a few years and then restart.
Sometimes you have to cut your losses and start over. Just because a stock used to be priced at $50 that is now $2 doesn't mean it will go back up to $50 again. Take that same approach to your real estate.
I'm not a journalist, just a person with an opinion!