Larry Steinhouse's Blog

June 1, 2010

Should I Let The Bank Take My Home?

Filed under: bankruptcy,Credit Score,foreclosure,Housing — larrysteinhouse @ 8:59 am

Recently, I was speaking with a friend of mine.  He told me that his daughter and her husband were  contemplating letting their house go into foreclosure.  He went on to tell me that their credit rating is well into the 700′s and they never missed a payment on the house or any other bills.

So why consider foreclosure, you ask?

Well it is simple.  The house they bought for $400,000 and have a $300,000 mortgage on, is now worth only $150,000 in their neighborhood.  That means they owe double what the house is worth today and already lost their down payment.

So here is the rub.  They can’t negotiate with the bank because, you guessed it, their payment history and credit score is too good!

The dilemma of many in this economy is upon them. Should they trash their credit score or continue to throw away money on a house that will take at least 20 years to be worth the value of the amount they owe today.

I decided to do some math on this problem.  I got out my excel spreadsheet and created a comparison and this is what I discovered.

The assumptions were as follows :

Mortgage payment (without taxes) on a $300K loan with 6.25% is $1847/month

Renting a comparable home in the area is $900/Month

I used a rent increase of 2% per year and a housing value increase value of 4%

I realize housing prices may still be going down but I believe 4% is a good average over the next 25 years.

So here are the numbers…

In the first year, each month they would save $947 for an annual total savings of $11,364

If they put away the difference and invest that in a 4% yield account and continue to to save that money compounded annually these are the results in 5 year intervals

after 5 years

Keeping the home

Value of home $175,479  Balance Due on home $280,012

Equity -$104533

Giving up home and investing difference…

amount in savings account $50,271

After 10 years

Keeping the home

Value of home $220,037  Balance Due on home $252,713

Equity -$30,677

Giving up home and investing difference…

amount in savings account $130,219

After 15 years

Keeping the home

Value of home $270,142  Balance Due on home $215,431 Equity $54,710

Giving up home and investing difference…

amount in savings account $204,673

After 20 years

Keeping the home

Value of home $328,668  Balance Due on home $164,514

Equity $164,155

Giving up home and investing difference…

amount in savings account $287,077

Finally After 25 years

Keeping the home

Value of home $399,875  Balance Due on home $78,271

Equity $321,604

Giving up home and investing difference

amount in savings account $378,302

Even after 25 years the savings account still has about $57,000 more.

(By the way, on average most foreclosures take at least a year and half. That means that they could live rent free for that time. Also, if you recall, I left out the taxes on the home and that could also be a substantial savings as well.)

This is certainty eye opening, but what about the other issues?

Your Credit score will definitely take a hit and may want to declare bankruptcy especially if you are over your head in other credit accounts.  Your credit score can and will be rebuilt in time.  If you are disciplined and work at it, you can rebuild to a descent score within 2 years and after 10 years the bankruptcy will fall off your credit report.

If you recall after 10 years you had $130,219 in your savings account anyway. That makes the bankruptcy  a bump in the road.

Now for the moral obligations and your ego.  Bankruptcy is and should be viewed at as a business decision.  There are options and you should discuss them with an attorney.  There is a book called “Bankruptcy ain’t broke” by Theresa Royal.

In this book she discussed her plight and emotions as she goes through the decision to file bankruptcy.  If you read this book you definitely understand that it can happen to anyone and life goes on. It is an emotional mess and you wonder if everyone thinks you are a loser, but the fact is they won’t and you will recover from it.

So what should my friend’s daughter and husband do?

They have the facts and I am sure whatever they do, it will turn out fine.

Larry Steinhouse

http://www.larrysteinhouse.com/

In my book “If I won 25 Million Dollars in the Lottery” I discuss some of the options if you are over your head and how to rebuild your life from this recession.

About these ads

3 Comments »

  1. Nicely said, and I agree with you on many levels. Many times I counsel with my clients I advise them to decide how much their credit rating is worth to them.
    The one point I didn’t see mentioned here is the bank’s right to pursue the deficiency balance or to issue the 1099c. Either could be crippling for a fincially stable household to endure. Basically I would just suggest the homeowner find a qualified agent to negotiate a settlement/ sale with the bank rather than lose the house at a sheriff or trustee sale.

    Comment by Bonnie — June 2, 2010 @ 8:49 am | Reply

  2. Thanks Bonnie,

    I agree, a “Deed in Lieu” is a great option. This is where the bank agrees to take the house and deed now, and not will not pursue the homeowner for the difference if the homeowner agrees to leave the house.

    It is also my understanding that the 1099c problem is not an issue if the homeowners have no assets, but don’t quote me on that. I am not an attorney or accountant :)

    Thanks for the comment!

    Larry Steinhouse

    Comment by larrysteinhouse — June 2, 2010 @ 10:06 am | Reply

  3. I’ve met Theresa Royal, she’s a local here.

    Comment by Rosanna Tufts — June 8, 2010 @ 8:54 am | Reply


RSS feed for comments on this post. TrackBack URI

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

The Rubric Theme. Create a free website or blog at WordPress.com.

Follow

Get every new post delivered to your Inbox.

%d bloggers like this: