I was puzzled too, because not long ago I remembered them buying a home, which at the time (maybe three or four years ago) was a major step up for them. It was a very nice home, and one that offered the space they needed for their growing family. I just assumed they would be there for years – maybe decades.

Somewhere along the way my friend got a promotion and his wife returned to work. They had some new-found cash flow, and felt some temptation to step up in house again. Rates were nearing an all-time low, and prices had been knocked down a bit in their area (though not quite as bad as in other parts of the country).

They decided to, in his words, “stretch a bit” to buy a much larger home (around 1,000 square feet larger), with a bigger lot and many more high-end features. They considered it a smart investment.

Fortunately, they sold their old house relatively quickly, and for the first couple of months they were tickled with the new place. Unfortunately, it didn’t last.

They soon realized that the new home came with larger bills. I guess they always knew that would be true, but now they were feeling it. They were paying more in utilities each month. Their payment was significantly higher thanks to higher taxes (they now owed city and county taxes since they moved closer to town).

My friend’s wife saw her hours cut at work, which was a mixed blessing since she missed spending more time at home with their kids. On the other hand, they counted on her earnings to help cover the mortgage. He said they were starting to feel “squeezed.” Looking back, he confesses, it would have made more sense for them to just stay put and find something else to “invest” in.

Finding Contentment

I can relate to what my friends are experiencing, and his story was a timely one for me. My wife and I often wish we could relocate to a different area. Houses in the area we desire are significantly more expensive than what we owe on our current home.

We feel like a move there would mean depleting our cash for a down payment on a larger debt. At the end of that trade we wind up owning less (savings) and owing more debt. That just doesn’t fit with our financial goals.

Since becoming debt free but the house our goal has been to acquire assets – things that go up in value, or add value to our lives, or create a passive income. While you could make the argument that real estate meets these qualifications, I don’t necessarily want to put all my eggs in my primary residence. I’d rather buy rental property, or land, or invest in REITs for real estate exposure. My home is my shelter; it’s not an investment.

When I start feeling a little house fever, I remind myself that all the granite countertops, square footage and stainless steel appliances in the world can’t change my fundamental feeling about new debt.

I don’t want to take on more debt. I want to pay off the remaining debt I have (the mortgage), and be free from debt altogether.

I don’t want to buy something that will cost me more to maintain, draining more money from future earnings.

I don’t want to buy a fancier roof over my head if I think one day I may not be able to pay for that roof, a roof that keeps the rain and the wind and the cold away from my family.

So for me, curing house fever is relatively easy. I take a walk around the outside of my home and think of the blessings I have inside, beginning with my family. Everything else is just stuff. And I don’t need a bigger box just to hold more stuff.

If I lost everything inside that house, but still had my wife and kids, I’d still be a blessed man. Anything else is just gravy.

As for my friend, he said they are looking to downsize, but are now having trouble selling their home – one of the larger ones in his neighborhood and significantly more expensive than the short sales happening around him.

As he put it, “We may never find someone dumb enough to take this house off our hands.” I told him to be positive, because after all, the previous owners did.

The following is a guest post from MD of Studenomics. He is releasing a brand new eBook today on making the decision if you should buy or rent a home in your 20s. This quick read is the best investment that you can make when it comes to helping you decide if right now is the right time to buy or rent.

When it comes to buying a home we’re all well informed of the costs that go along with this purchase. We understand that you need to pay taxes, pay for moving costs, deal with loading your place up with furniture, pay the lawyer, and deal with many other expenses. There’s one more expense that we don’t really factor in.

What’s this hidden cost of home ownership? It’s TIME. Time is a ownership cost that most of us rarely factor in when we decide if we should rent or buy a home in our 20s. We run all of the financial calculations and crunch all of the numbers. What we don’t do is think about the time that we’ll now have to invest as a new home owner.

Why is time such a hidden cost when it comes to home ownership?

• You’re going to have to wake up an hour earlier in the winter to shovel your driveway.
• You’re going to have to spend a Friday night raking leaves in your backyard.
• You’re going to spend time on fixing up rooms and customizing them to your expectations.
• You’re going to have to spend an afternoon waiting for the cable guy to show up to fix your internet connection.

Simply put you’re going to have to spend lots more time on your new home than you ever did with your rental. When you rent a place you don’t really have to deal with anything at all. As a renter you just deal with your own basic household chores. The rest of the work or anything that breaks down gets delegated to the landlord of the unit. The renter simply calls the landlord to deal with most issues around the place.

What if you don’t want to invest all of this time into your new property? Well then you have two clear options for how you can avoid this heavy capital investment:

1. Outsource the work. You can always pay someone else to do the work. You can hire a landscaping company shovel your snow in the winter and mow your lawn in the summer. You can also outsource all other household related tasks. The obvious benefit here is that you can save yourself lots of down. The downfall is that it’s going to cost you
   even more money.
2. Avoid the work. You can also attempted to avoid the household work. We all have that one home in the neighborhood that always looks like a complete mess. The benefit here is that you don’t have to worry about investing time or money into tasks around the task. The obvious setback is that your home won’t be attractive at all.

As you can see there’s going to be a heavy time requirement when you decide to buy a new home. Once the euphoria of owning a home fades away, you’re going to be stuck with all of these new tasks on your plate.

Is there any other solutions to the time investment required with your property? You can either enjoy the work or think of it as an investment. Enjoying the work can become really easy because after a while, mowing your lawn on a summer morning can be a great feeling. The investment part comes into play when you start to perform upgrades on your house. In the process of upgrading your home, you can improve its market value when you plan on selling it eventually.

As a young professional are you ready to invest all that time into your new home? Would you rather outsource these tasks?

If you want to learn more about deciding if you should rent or buy a home in your 20s, please check out my new eBook on the topic.

Post by Frugal Dad

A recent report issued by RealtyTrac® indicates foreclosure activity in the month of April was at its lowest point since December 2007. That might sound like good news, until you dig a little deeper.

The reduction in the number of foreclosures processed is largely due to the increase in the amount of time it takes to foreclose. The same report indicated it took an average of 400 days to foreclose in the first quarter of 2011. That’s up from an average of 340 days during the same period last year.

For some perspective, in 2007, foreclosures took about 151 days.

What does this mean for the housing market and those interested in buying a home? Well, as I’ve said before, I don’t have a crystal ball. However, if I were in the market and could afford to wait a few months to buy, I might consider holding out, unless you think the opportunity is just too good to pass up.

I think we’re going to see a wave of foreclosures hit the market between now and the end of the year. This could be especially true in states such as Massachusetts, New Jersey and Nevada.

Unfortunately for sellers, this probably means home valuations are headed lower again. Simple economics tells us that as supply increases, the price decreases (all other factors being equal, of course). Again, bad news if you are planning to sell, but potentially good news if you are in the market to buy.

Interest Rates

The “X” factor in this discussion is interest rates, which are hovering at around 4.5% for a 30-year mortgage. I believe the Fed has kept rates too low too long in an effort to help a sputtering housing recovery. They know if they raise rates while potential home-buyers are already on the fence, the housing recovery could completely stall.

I recognize it is a delicate balancing act, but I think the pendulum has swung too far for too long.

The benefit of low rates is that borrowing money to buy a home may not be cheaper for a generation. The downside is inflation; as we’ve all experienced at the grocery stores, gas stations and elsewhere over the last several months.

If interest rates begin to move up, as I suspect they will soon, a shaky housing market could cool even further. In a matter of months we could be looking at higher costs to borrow and a wave of new foreclosures hitting the market. Not a good combination for homeowners.

Real Estate Investors

This could make for a good time to buy an investment property, if you are so inclined, and your finances allow it.

In a recent post I discussed the dilemma of being out of debt and wondering how to allocate money to savings, investing, etc.

I’m not much of a market timer, however, I’m also convinced the market is just about maxed out in the near term and may backslide a bit in the coming months (particularly if this housing market gets any uglier).

Instead of piling cash into investments that may soon get the rug pulled out from under them, it might make since to invest in more tangible assets, such as real estate. Now, I have no illusions of fixing and flipping, rather I’d love to find a small property that I could rent out, using the cash flow to pay off the mortgage quickly and enjoy years of rental income.

Even if the house itself appreciates very little over the years, the earnings from renting could make real estate investing a profitable idea. Until the real estate market shakes out, I bet the number of renters increases significantly, increasing the demand for rental properties.

Of course, if you have enough cash, and enough patience (and savvy) you could even look at buying a foreclosure. I signed up for RealyTrac’s service some time ago to monitor the foreclosure properties, and other homes for sale, in my area. It’s a little expensive, but they do offer basic information for free and they have a 7-day free trial to check out their offerings.

If you aren’t up for land-lording, it may also be a good time to look at land – timberland, farmland, etc. Like my grandfather used to say, “They ain’t making any more of it.” I suspect land itself (improved or otherwise) will continue to appreciate more than home values in the near term. And of course with the news of food shortages, farmland has been a very hot commodity in recent months.

In addition to traditional investments such as stocks and bonds, I believe real estate, in some form, should be part of your overall investment mix, along with more conservative investments such as CDs, cash, and gold and silver. You can adjust the mix according to various factors such as your age, risk tolerance, etc.

Post by Frugal Dad

The following guest post is from Jack Simms, a former real estate professional. Jack’s bio appears immediately following the post.

The economic turmoil in the United States is nowhere more apparent than in the residential real estate world. All of that bad economic news that we hear about daily has led to a flood of homes being listed for sale. Americans in record numbers are placing their homes on the market to downsize, to avoid foreclosure and to get out of loans they no longer can afford. In this market where prospective buyers have so much to choose from, making your house stand out can be a challenge.

When the market was at its peak, the concept of “staging” a home, or revamping its appearance as a marketing strategy, had really taken hold, and an entire industry of professional home stagers had emerged. In this distressed market, however, sellers should consider several simple, inexpensive ways to enhance their home’s appearance before listing it for sale.

1. Clean, Clean, Clean. Of course your house needs to be clean when prospective purchasers come through, but you would be surprised at how often homeowners neglect this simple, no-cost tip. We all lead busy lives, but if you really want to sell your home, making sure that the kids’ toys are put away and that the dishes are safely in their spot is a must.

2. Rearrange Things. It’s hard for homeowners to hear that their chosen furniture arrangement needs work, but you must consider the appearance (not necessarily the functionality) of your personal property when trying to sell your home. For example, although most people display furniture so that the television is the focal point, that’s not always the most aesthetically pleasing arrangement. But, fear not, despite a little heavy lifting, following this tip shouldn’t cost a dime.

3. Don’t Forget about Curb Appeal. Most sellers concentrate on the interior of their homes for good reason, but you can’t neglect the exterior. Pulling weeds costs nothing and shouldn’t take much time. If your yard is an eyesore, you may want to invest in some more extensive landscaping, but before you take on any project, consider how much it costs versus how much value it might add to the home.

4. De-Clutter. The #1 complaint of prospective purchasers when they visit homes on the market is clutter. Unfortunately, it’s very difficult for some people to see past your stuff strewn all over the room and envision a world where their things look tidy and neat. So, while your home is on the market, put away magazines, kid’s toys, dog beds, litter boxes, etc. A good rule of thumb for most folks is to remove at least a few items from every room.

5. Hit the Thrift Stores. If you’re not the type that needs to de-clutter and, instead, you need to spruce up your décor, you don’t have to break the bank doing so. Consider a trip to a thrift store, a flea market or a yard sale. Because these places can be overwhelming, make sure you go with a mission. If the living room desperately needs a lamp, make that’s your sole priority when shopping.

6. Bring on the Green. Plants and flowers can bring a room to life. But you don’t have to purchase an expensive floral arrangement or a luxurious plant from a nursery. Instead, check your yard for fresh blooms or look for wildflowers.

7. Let there be Light. If you have fussy drapes or other heavy window treatments, consider removing them while the house is on the market, or at least opening them up so light can fill the room. Letting in the natural light and providing a clear view of the outdoors can make a room feel larger and more alive.

8. Don’t be a Closet Case. Unfortunately, you can’t just hide your clutter in your closets. Buyers these days are obsessed with closet size, so be ready for them to take a peak at yours. The more cluttered a closet is, the smaller it will appear to those considering a purchase.

9. Keep it Simple. If you have a flair for the dramatic, make sure you tone it down when your house goes on the market. If you have to splurge on a new coat of paint, for example, opt for neutral colors. The goal is to make your home appeal to the broadest cross section of the population possible.

10. Depersonalize. There’s no need to remove every possible sign that someone does actually currently inhabit the property, but it can help buyers imagine themselves in the home if your family photos aren’t prominently displayed.

Jack Simms has been providing research on issues of interest to home buyers and owners for LeadSteps.com’s Online Mortgage Rates business for three years. Prior to his involvement with LeadSteps, Jack was a real estate professional providing marketing services to realtors in northern California. Jack’s research for LeadSteps’ Mortgage Rates Website is driven by his desire to better explain the complicated decisions involved in both home ownership and the purchase of a home.

Post by Frugal Dad

Property taxes are one of the principal means that cities and municipalities use to raise revenue. Property taxes are generally based on two things: the value of the property itself, and the local rate of taxation. Both of these values can fluctuate depending on several different factors, including voter approved tax increases, city or state efforts to raise taxation, and the relative health of the real estate market.

How are Property Values Assessed?

The value of a property is usually “assessed” by a professional property assessor. His evaluation of the property sets the corresponding value of the property, and allows for the determination of the total amount of property taxes that are due.

However, depending on when this process was conducted and subsequent changes in the market, the actual value of the property in comparison to the last assessment may not match. For this reason, the process of property taxes appeals can provide significant legal reductions in the total amount of money owed by any given property owner.

Traditionally, the municipality sends out tax notices at the beginning of each year notifying property owners what the amount of their new taxes will be. Due to the recent economic crisis, cities and municipalities across the nation have increased the amount of property taxes they are collecting in order to bolster their shrinking revenue.

This means that many homeowners are currently paying far more in property taxes than they technically owe. Because of the nature of the government’s collection methods, it is the responsibility of the homeowner to verify that he is not being taxed more than his fair share.

Property Tax Appeals Process

To appeal property taxes, a homeowner should hire a professional assessor to survey the property. Each state and county has its own particular assessment methodology: when hiring the assessor, it is in the best interest of the homeowner to ask if that particular assessor subscribes to the methodology used by the city.

This will save time not only in the preparation of documents, but in the appeals process itself. If the assessor discovers that the property is worth less than what it was initially purchased for, the homeowner is entitled to pay less property tax.

Once the paperwork has been completed, the homeowner should take these papers into the city assessor’s office and ask that the rates on the property be lowered. It is vitally important that the paperwork is completed by an official property assessor in order to successfully appeal property taxes.

A flimsy or ill-constructed assessment will not impress city officials, who have everything to gain and nothing to lose by finding small flaws or bureaucratic inaccuracies that would potentially invalidate the legitimacy of the paperwork. By investing significant amounts of time in the preparation of an irrefutable claim to lowered property value, a property owner will ultimately save himself enormous amounts of stress.

Property taxes appeals can take anywhere from between 45 to 60 days, depending on the process of the individual municipality. Usually, the paperwork is submitted to the County Appraiser, who must then weigh the evidence in a series of fact finding hearings.

To find out precisely how long this process will take, research the policy of the local County Appraiser. At the end of this period of time, the municipality must issue a decision on the validity of property tax appeals. The decision will be reflected in the next year’s tax notice.

Living frugally is often a matter of being vigilant about paying for exactly what is owed, and not being accidentally or purposefully overcharged. By taking careful steps to ensure that everything, including the value of something as significant as a home or other piece of property has been properly calculated, enormous amounts of money can be saved.

Post by Frugal Dad

You just moved in to your new home and it’s got you thinking, it’s time to renovate. You have big ideas and plan to tear down walls to open up the space. Before you make a single move toward renovation, I am here to tell you, it’s not as easy as it looks. Take a look at my latest at Man of the House to see my mistakes and learn how to avoid the pitfalls of renovation.

Lessons from a Home Renovation

Not long after my wife and I got engaged the talk started about where we would live. At the time we both owned our own places and since my condo was much closer to where she works the decision was made to live at my place, sell hers and then work on finding a house that would be ours.

In late 2005, the real estate market was still bustling with activity and I had a very strong desire to find an older home that needed to be completely renovated. The homes in the in-fill neighborhoods where we started our search were being gobbled up at a feverish pace. Tear down properties in the best areas were running as much as $400,000, which was well out of our price range.

To read the full article, click on over to Man of the House.

Photo by jdn

One of the benefits of having readers spread across the country, even the world, is that often we are introduced to a different perspective on a particular topic. And often that leads to even more thoughtful discussion. That was the case recently when I wrote about my thoughts on the television show My First Place on HGTV: How to Spend Your Next Thirty Years House Poor.

While many agreed the premise of the show seems to steer first-time home buyers towards more expensive housing, few of us could agree on whether or not the featured couples could afford such housing. Part of the problem is key elements of an affordability equation are often missing – such as income, other debts, etc.

An even larger discussion developed regarding the regional variance in housing prices. I must say, even I was surprised by some of the comments (and there were a bunch of them – 91 at last count!).

In response to my suggestion the couple should look for a house in the $200,000 range (half their intended budget), reader “Cat” commented:

I completely agree with your post, however, in the city I live in a you cannot get a house for $200,000 even in the worst part of town right by the railroad tracks. You’d be hard pressed even to find a crappy condo for that low of a price here.

As a guy who grew up in a $27,000 (at the time it was purchased) house built in the 1960’s, and purchased a decade later, that was hard to believe, but no doubt true considering the grossly inflated real estate markets around the country. Of course, everything is relative. Areas with high real estate values also usually offer higher salaries, making these more expensive homes affordable to potential home-buyers.

Still, I was struck by the number of people who indicated they could not find a decent home for less than $450,000. My gut reaction – why not move? But it’s not that easy.

People tend to settle close to family, where they graduated school, or near job opportunities in their particular field. Others may enjoy a particular climate or part of the country. It’s not easy to just pack up your stuff, leave behind family, and move clear across the country.

I’m fortunate in that I live in a relatively small town in a very reasonable real estate market. Home values here are among some of the most affordable in the country. It was a consideration we made when accepting a new job ad relocating here some six years ago now. It just so happened to be the same city my mom lived in, and before she passed away (a year ago today, in fact), we enjoyed being closer to family.

Comparing Apples to Apples: Housing as a Percentage of Income

We spend about 15% of our after-tax income on housing. I’m comfortable with that figure, even though when we were shopping for a home those involved in real estate tried to convince us we could easily afford to mortgage 25%-30% of our take home pay on monthly payments. No thanks.

The reason we avoided taking on a larger mortgage is risk. Risk of job loss, illness, income reduction, etc. should weigh heavily on you when deciding how much house to buy. Instead, risk is often an after thought. Oh, that won’t happen to us. We have plenty of savings. I can always find another job. Trust me; it will, you don’t, and you might not.

It’s worth pointing out that if I moved to another part of the country, and made significantly more money than I do now, then 15% of my income would buy a more expensive house (not necessarily more house, just a more expensive one).

Unless the couple in that show were bringing home $20,000 a month, a $3,000 a month mortgage was probably considerably more than 15% of their income. It may have been more in line with 30% of their take home pay, and if that works for them, they can probably pull it off, assuming nothing goes wrong over the next 30 years.

Relocating for More Affordable Housing

So the big question is this: Would you consider moving to a new city if housing prices were cheaper, and you could buy more house for a lower percentage of your monthly income? After all, these days more people are considering relocating to end unemployment; why not relocate to spend less on housing, often a family’s largest budget category.

Obviously, one would have to consider a variety of other economic factors such as general cost of living, average salaries and job opportunities, quality of education, crime rate, climate, and very personal matters such as proximity to friends and family.

It is certainly not an easy decision, but one I would strongly consider obligating myself to such an expensive housing payment. By the way, I found this Best Places to Live in America post which lists average home price. You can see from the list there is a considerable range, even among the top places to live.

Post by Frugal Dad

I spent the latter part of last week in bed with a nasty virus. Because I was so wiped out, the only thing I felt like doing was lounging and watching old movies. In between Godfather DVDs I caught an episode of My First Place on HGTV. I’m fairly confident I have seen this show before, but as I was reaching for the remote control, a comment from the young couple being featured caught my attention.

“Our budget is $475,000 to $490,000.”

Huh? These young people barely looked old enough to buy an adult beverage, and they were considering a half-million dollar home? They had my attention.

For the next thirty minutes or so I watched these young people roam from house to house with their real estate agent. I was extremely impressed with their thoughtful considerations of each house. You know, like which one had enough room in the backyard so their two dogs could play without feeling “claustrophobic,” and which house would be best for “entertaining.” After all, these are important considerations when just starting out. End sarcasm.

It was at this point that I began to regain my strength. I think it was adrenaline actually, as I had the overwhelming urge to reach through the television and smack some sense into these people.

Admittedly, I know very little about this couple, other than one is an “account executive” and the other is in medical sales. However, I think it is safe to assume that unless they inherited a couple hundred thousand dollars, they planned to borrow most of their first purchase.

$3,000 a Month for Thirty Years

Let’s run some numbers working with our assumptions. I think the couple settled on a house listed for $490,000 and paid about $475,000 (I don’t remember the exactly sale amount). I’d like to think they saved up at least 10% to put down, which is a fairly large amount of money for this size house. Perhaps they did have $50,000 to put down, and financed the remaining $425,000 on a 30-year mortgage.

Their monthly payments would be around $2,281 before taxes and insurance, which could easily add another $800-$1,000 a month, bringing their total monthly mortgage payment to over $3,000. Let that sink in for a moment.

This 27 year-old couple was about to sign a binding contract promising to make 360 payments at $3,000 a month for the next 30 years. They would be 57 years-old by the time they paid off the mortgage.

During those thirty years they would likely have children, and have to continue working like maniacs to make that $3,000 a month payment. They would need to save for retirement, pay for the annual vacation (or two), buy, maintain and replace seven or eight cars between them, deal with a medical emergency, deal with a medical emergency with their parents, deal with a job loss, etc. They would have to deal with all of life’s curve balls with a $3,000 a month obligation hanging over them.

“But We Can Afford the Payments”

When I watch people engage in this type of transaction, I can’t help but be a little sad for them. And my feelings aren’t limited to those taking out a huge mortgage – even though these are usually the longest of financial commitments. Many people borrow money for expensive cars and such which obligate them to costly monthly payments for a number of years because they can “afford the payments.”

Hearing the statement, “we can afford the payment” is a sure-fire sign someone can’t afford the payments. Marketers have won the battle of convincing us that we can afford things we can’t if we only have to pay for it every thirty days, rather than all at once. But what happens when you hit a bump in the road? What happens when life happens? Because trust me, it will.

Someone will get sick. Someone will get hurt. Someone will lose a job. Someone will get stuck in a soul-sucking job and dread Monday mornings like a trip to the dentist. Life is not always rosy. Things happen. I’m not being a pessimist, I’m being a realist.

It’s hard to tell that to a couple 27 year-olds with their whole life ahead of them and without a care in the world. Sometimes people have to find out the hard way. I just wish people would listen to others who have been down the same road (if you are a parent, you can relate to this).

My First Place: An Alternate Ending

Imagine if this same young couple decided to put their $50,000 down payment on a $200,000 home, and finance only $150,000. Their monthly payment drops to about $800 before taxes and insurance, they avoid having to pay private mortgage insurance (PMI), and they can seriously consider a 15-year mortgage, or paying off a thirty-year mortgage in the same amount of time. They could easily be debt free before 40, house and all.

Yes, they would be giving up a little space for entertaining, and the dogs would have to get used to a smaller backyard, but imagine the freedoms they would enjoy. Imagine them as a 40 year-old couple with a $225,000 house, a modest pile of savings, and zero debt.

Imagine a young mom having the option to stay home with the kids. Imagine those kids going to college and graduating without debt because their parents can afford to help. Imagine those kids getting married and making a similar first-home purchase decision because they admired their parents’ frugality. In one single decision, that couple could complete change their family tree, and one day leave behind a legacy of debt freedom for generations to come.

This post appeared in the Canadian Finance Carnival

Post by Frugal Dad

For some, the idea of walking away from a mortgage presents quite a moral dilemma. Others feel duty-bound to fulfill their contractual obligation to continue making payments to the lender, regardless of how much (or how little) their home is worth.

Personally, I believe if one has the ability to pay their debts, any debt, they should pay them. This idea doesn’t stop with mortgages. I don’t like voluntary car repossessions or walking away from credit card debt you legitimately owe and can afford to pay.

Think about it. When you signed your signature 27 times the day you took on a mortgage, you accepted some risk that the “investment” you were making would hold its value. The lender made the same calculated risk, and even required you to buy private mortgage insurance if your down payment was small to transfer some of that risk away from them.

Now, there is a difference in someone losing a job, struggling to make their mortgage payment and other obligations, and someone who simply wakes up one morning and decides they are no longer going to pay their bills. Those in the latter category rationalize their decision with sentiments like, “Well, why should I continue to pay for something that is of lesser value than when I bought it?”

Using that same logic, we’d walk away from new car loans, and even credit card debt, because the things we “financed” are not worth nearly the same value now as when purchased new. Besides the question of ethics, walking away from your mortgage, or any debt, can have serious financial consequences.

Damage to Your Credit

If you simply walk away from your mortgage, you credit will take a hit. If your credit is already shot, you may not care. If you are of the opinion, what’s a good credit score good for anyway, then you may not care.

If you recognize that maintaining a good credit score is a necessary evil in today’s society because insurers, employers and lenders check scores when making offers, you might consider damage to your credit score a negative consequence of walking away from a mortgage.

Apart from the hit to your FICO score, walking away from your mortgage could also present legal issues. Walking away from any debt means the lender is free to foreclose (or repossess) the item you financed and sell it at whatever value the market brings. For foreclosed properties, that usually means a big discount.

If the amount the property sells for isn’t enough to clear the debt owed against it, guess who the bank can legally come after? That’s right, you. So “walking away” doesn’t necessarily mean you are off the hook.

Alternatives to Walking Away from a Mortgage

Workout payments. If you are legitimately in trouble, for whatever reason, and are unable to make your mortgage payment, attempt to work with the lender. Most mortgage issuers are preparing for a higher rate of foreclosures in the near future, which could mean big losses for them. They’d much rather have customers continue to stay in the home and make payments.

Short sell. If you do decide to sell, discuss the option of a short sell with your lender. Basically a short sell means selling the property for less than is owed, at a mutually agreed to price amongst buyers, sellers and the current lender. Be sure to negotiate a sale without recourse – meaning the bank cannot come after you for the balance of the loan (as described above).

Do nothing. If your mortgage is underwater, meaning you owe more on your home than it is worth, but you are able to continue making payments, then the most attractive option may be to do nothing. Stay put. Hope that the economy comes around in the next few years and your value comes back. In time, by continuing to make payments, you will eventually reach a point where your house is no longer underwater.

The Housing Bubble Lessons Learned

I lived in rentals growing up because my mom could never afford a down payment on a home. Until just recently, my family leased a house until we were debt free. During that time as a renter, all I ever heard from others was that we were making such a mistake by not buying a home. A home was a fantastic investment. Renting was like throwing money away.

Well, I wonder how many of those same people still believe that. A home can be a good investment, but mostly it’s just shelter to keep you and yours warm and dry. That’s all it is. And it doesn’t matter if you pay a mortgage company or a landlord to keep that shelter.

Of course, you may have more freedoms owning real estate, but you have more responsibilities, too. There are pros and cons to virtually every financial decision we make, so do what works best for your situation. Whatever you do, avoid buying real estate until you are on a solid financial foundation and avoid viewing it as a significant investment. After all, we’ve seen how quickly that “investment” in real estate can drop.

Post by Frugal Dad