This is a continuation of You Want to Own Your Own Home, But Do You Own it the Right Way? (Part 1). In the previous post, we compared Smart Stan and Timid Tom and how well their mortgage plans played out. We ended at the five year mark with Stan and Tom laid off and looking for new jobs. Stan had plenty of money to hold out for the best job, while Tom was stressed out since he had no money and was potentially facing foreclosure.
In this part, we are going to change things around a bit. Let's assume that they didn't lose their jobs at the five year mark, but that a hurricane came through and destroyed their homes instead. While that may leave them without a job temporarily also, we won't focus on that, but on the how the storm affects their equity.
A quick recap should that Tom's mortgage was costing him a net of $1,489, and actually at this point it is likely more than that as the tax deductions have decreased. Tom has no money in savings, having devoted his money to pay off the mortgage as fast as possible, just as most Americans think they should. Meanwhile, Stan has a net mortgage cost of $1,234, maybe a few dollars more, but he has $79,000 in the bank.
Since their homes are destroyed, they are without living quarters and must now find shelter and pay rent until their homes are restored. Typically, the time frame to fix a home is upwards of a year, and many times it takes over a year to repair the home. We will say it only took a year for this comparison.
So, the two men are homeless and find a place to rent for just $1,000 per month in the same apartment complex. It is considerably smaller than their home, but it is a nice place for the average rent in their area. They both are lucky in that their lender waived the mortgage payments for two months, as they typical do after a destructive hurricane.
Tom now is able to live for a couple of months just paying off his rent using the income he still has, but now he saves the extra money and stores it, so he saves one month's mortgage payment over the 2 months before he has to start paying again. But after 3 month's he can no longer afford to pay both the rent and the mortgage, so he decides to let the mortgage go, since he must pay the rent to maintain a place to live. A few more months and he is in foreclosure and will likely lose all of the equity he built up in his home, costing him nearly $80,000.
Stan, on the other hand, has the $79,000 he can use to help cover the payments after 3 months. He waits, impatiently, until his home is repaired during the year, then moves back to his home and resumes his life, costing him only about 9 months in rent or about $9,000 loss. Compared that to Tom's nearly $80,000, destroyed credit for years, and the fact Tom is stuck renting for several more years before being able to purchase a home again.
Before you dismiss the scenario as a hurricane event only, this can happen to you, regardless of your location. Many homes are destroyed by fire, tornadoes, earthquakes, and even just passing storms that produce damaging effects. That is not to mention flooding, which probably destroys more homes each year than the rest. All of these can put you in the same position as Tom and Stan. The question is, who would you rather be when it happens?
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