Dont we all like the home we live in? Our kids are in established schools, we have lots of memories in the house, we like our neighbors, and weve redecorated. The list goes on. But were facing financial difficulties – perhaps facing foreclosure? But moving would be very hard. It disrupts a familys life. Letting our neighbors know that we are facing financial difficulty would also be really hard.
But if If I told you that reduced mortgage payment and the temporary monthly payment reduction is really costing you upward of $17,000 a year EXTRA by staying in the house, would you believe me? So to know the loss or gain associated with a loan modification versus a small sale let’s do the math. Let’s take a San Diego example.
1) Assume your loan is for $400,000, at 6.5% fully amortizing rate (meaning you are paying down the loan) and it is for30 years 2) After 30 years between interest and principal you will have paid $910,177 to the bank to payoff the loan. Thats a lot of money! In 5 years if you need to sell you would still owe $365,000. That is $162,000 in negative equity to be made up in a very small period of time.
What if lenders are not granting small sales at that time? You will still not have made any money on that house, you will have paid out $30,339 in interest and principal – AND YOU WILL GET NONE OF IT BACK. The bank still might take your home.
So lets look at the scenario where you got out today in a small sale, and bought another house in 1 year, which is possible if you are aggressive with your credit repair. In one year that same home will likely be worth less. So you go out and buy a similar house, now worth $175,000 with 10% down. Your loan would be $157,500. For comparison sake lets assume the interest is 6.5%, fully amortizing for 30 years. Your total interest paid for the life of the loan would only be $200,244. To pay off the entire loan over 30 years you would end up paying $357,244. Take $910K – $357K that’s a savings of $552,993.00 – a half a million dollars!
So by moving on, particularly if you are facing a financial difficulty, you will not only get out of your negative equity situation (and essentially be losing money), but you will save over $500,000 by getting out and getting back in.
What would you do with that money? Pay for college education for your kids? Save up for retirement? Pay off other debts?
Let me question you, does it financially make sense to stay in the home? I know you like it, but separate out the emotions from the finances. What ultimately will be best for you?