Is Your Home Worth Keeping
Is your home worth keeping?
A 'rescue' may lock you into high payments that make it hard to pay bills or save for retirement. But deciding to walk away isn't a strictly financial calculation.
By Liz Pulliam Weston
This is not a column I wanted to write, and certainly not one your lender wants you to read.
But now that troubled borrowers are being given more options to save their homes, the question remains: Should they try?
There's no doubt that the future of our economy depends on slowing the foreclosure rate. After months of dithering, lenders and regulators are finally rolling out loan modification plans that may help many homeowners.
But what's good for the economy may not be good for you personally. Falling home prices and the details of the modifications mean fighting to save your home isn't a slam-dunk.
Unfortunately, in purely financial terms, sometimes the smart decision may be to let the bank foreclose.
Consider:
Your payments will still be high. Most loan modification programs seek to reduce payments to 38% of the borrowers' income. I advise folks not to spend more than about 25% of their gross income on shelter, 30% at the outside. Otherwise, it's tough to pay your other bills and save for retirement. If you have big expenses other than your mortgage, such as credit card debt or child care costs, spending nearly 40% of your income on a mortgage could doom you to years of financial struggle and an inadequate retirement.
You may be "underwater" for years. Many troubled borrowers owe more on their homes than the houses are worth, meaning the borrowers can't refinance or sell without owing money to their mortgage lenders. Yet few lenders have been willing to reduce the principal borrowers owe. They'd much rather lower interest rates or stretch out the loan terms, turning a 30-year mortgage into a 40-year one, for example. (For a comparison of 30- and 40-year mortgages, read "Mortgages that outlive you.") No one expects home prices to turn around...
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