So, you are "stuck" with a 6.25% interest rate on your 30 year fixed rate mortgage for $400,000. You are bent out of shape because you really were hoping to refinance in order to get a mortgage interest rate in the 4's, like people you know have done recently. Should you say forget it now that you are "under water", throw in the towel, and walk away from your home? You aren't interested in the moral or ethical side of the equation, or are worn down from the constant barrage of tales of woe in the news and from friends and family, so you just want to look at the numbers and your bottom line.
Maybe you are in the 25% federal income tax bracket, and walking away means that you are leaving your roughly $31,000 in deductible expenses (consult your CPA/ tax advisor to obtain accurate numbers based on your individual circumstances). That's only roughly $7,750 per year in tax savings, right? But, wait! You are going to be renting for many years with a foreclosure on your credit profile - 3-4 years must have passed since a foreclosure took place to meet the underwriting criteria for most home loan programs today, but I saw underwriting guidelines extend this period out in previous economic downturns to 4, 5, & 7 years. So let's look at the median, and presume you are losing your tax benefit for 5 years, taking a look at how this affects your pocketbook.
•· Are you willing to accept this $38,750 "charge" you are taking on when you walk away from your home?
•· Give up your "high" 6.25% interest rate for whatever rate you get when you re-enter the market in 5+ years, a rate that is likely to be substantially higher when the piper comes to call to collect on the federal debt our heirs will have to repay one day sending interest rates way up due to inflation? Maybe you are able to replace your $400,000 home with the same home at $350,000, but now interest rates are at 8%. So, now you pay more interest and property taxes than you had to begin with!
•· Do you remember how motivated you were to give up the life of being a tenant and become a homeowner for the first time? Are you prepared to go back to the days of annual rent increases, landlords reluctant to make repairs, forced moving expenses, and associated disruptions(change of address, new checks, change of schools, loss of friends in the neighborhood) for you and your family?
•· These are uncertain times in the job market, with a lot of competition between qualified applicants for high-paying jobs. Many of these jobs require background and credit checks. Do you think an employer just might choose the applicant without the foreclosure on their record if they are weighing multiple applicants?
•· What happens if underwriting guidelines change, and the loan program you need in order to buy your next home in 5+ years no longer exists, as many self-employed borrowers have discovered who used to qualify for their home loans using "Stated Income" programs, as have the first time home buyers who used to use down payment assistance programs that are no longer available to them?
•· What if you have to come up with 20-25% down payment when you want to re-enter the market, since bank failures continue to happen letting the big banks who were able to stay in business with Federal taxpayer assistance have less competition and can dictate higher costs/interest rates and tougher lending criteria?
•· Have you looked at an amortization schedule for your mortgage? Notice how the interest on home loans is "front loaded", with you paying more interest in the beginning, and less and less as you go along? Ready to start over in that cycle starting from square one paying more interest in the beginning? How much will that cost you?
Of course there are many homeowners and investors whose financial circumstances and job situations have made foreclosure unavoidable for them. But if you have a choice - and forgetting about what these foreclosure rates do to everyone else-, is choosing foreclosure really in your best interest? Please think long and hard before taking this step, and consult your tax advisor before letting your home go back to the bank. Don't throw in the towel until you have delved deep in to this necessary decision making process.
Maybe you will discover you just need to shut off/stop reading the news, and start writing to your elected officials to request they follow through with the changes you may have voted for is this past election. Turn that towel you were going to throw in to something else.
See you out there!
Karen Cooper - OR/CA Mortgage Consultant - www.Quality4Loans.com
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