What Is Your House Worth To You?

Gingerbreadhouse Let me just paint you a picture. You have a two income family with two children and a lovely house. Your mortgage payment is around $1200 a month plus taxes and insurance. It’s not too bad and hovers around 30% of your income, so you’re sittin pretty.

Bam!! One of you loses your job, and your mortgage payment is now 60% of your income. In order to pay the mortgage you have to pay your other bills with credit cards in hopes that you get a new job soon. But the economy sucks, your cards are maxed out, and you’re passed due on the mortgage, so the bank is foreclosing on your home.

You finally decide that bankruptcy is the best option. So you go through bankruptcy and you say to yourself “I’ll get a modification on my mortgage and keep my home. Even though they’ll only bring it down to $1000 a month I’m sure I’m bound to get a job soon.”

Why?

Why would you put yourself through that again? Why would you want the sleepless nights and all of that stress weighing you down to pay a mortgage you can’t afford? Why would you put yourself into that cycle?

Am I missing something? Is it because I haven’t owned a home before so I don’t know the feeling? Maybe it’s a good thing this is happening to people every day. Kids will get to be on the outside looking in as their parents stress out over a house.

I know that if I was in that position I would have tried to do whatever I could to get rid of the house. Maybe try renting it out if you owe more than it’s worth. You don’t need to make a profit, just rent it for whatever covers your cost. I know that would be good for you and I’m sure some family would love to rent a home from you because it will be cheaper than renting from someone trying to make a profit.

If anything, and I was forced to bankruptcy, I would absolutely not keep my house. My family’s well-being is much more important than some drywall.

What do you think?

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{ 20 comments… read them below or add one }

Len Penzo

If I was the family household CEO, I would not have kept the house either – mainly because it appears I was pretty irresponsible based upon the scenario presented.

The mortgage payment already ate up 30% of my household income – while not unacceptable, it does approach the borderline of what’s usually considered acceptable today (although lenders were much more lax a few years ago when they couldn’t give money away fast enough). I probably should have scaled back and bought a smaller house that would have taken up less income.

But worst of all, it appears I had zero money in my rainy day emergency fund! To compound that blunder, I was maxed out on my credit cards – which means I was living well beyond my means!

Getting a loan modification would only be delaying the inevitable!

Best,

Len
Len Penzo dot Com

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Kevin

yea, a lot of people are in that situation right now because no one thought the economy would go down…now that it has, some people don’t want to let things go.

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Money Reasons

The problem is too many people bought to expensive of a house with financial instruments that were risk to begin with. A house traditionally has been a great investment, and someday (perhaps soon) it might be again!

We planned our house purchase based on my salary at the time, and calculated the numbers based on the idea that no raises would occur (this is probalby why we were able to paid our house off in 10 years). Since my wife was going to be a stay at home mom, we didn’t even consider her salary.

As for our house and the reasons to stay… Your kids will become attached to the house that you live in. When I was younger, I didn’t have that kind of security. So even today, I still have a lot of my stuff packed in boxes in the basement (perhaps subconsciously for the next move)… In fact, one of the reasons that we live here still, is because the kids feel an attachment to the house (and really more importantly the neighborhood)..

One final note, owning a house is a lesser form of forced savings. You’ll build equity in your house if you stay there long enough. If you rent, there is a good chance this won’t happen…

That said, if I were single… I’d probably be renting :)

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Kevin

yea, It’s emotions thing that keep people there. Some people feel like they worked their whole life to own a home and don’t want to let it go. I just don’t see how, even for the kids to have security (not your situation because you can afford it), you could stay in a house you can’t afford. I feel like that will eventually have a negative effect on them with stress and teaching them to buy things they can’t afford.

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Kevin@OutOfYourRut

My wife and I sold our house when things got difficult for us. Then the housing crash hit! One of the best moves we ever made–but it wasn’t because we had a crystal ball. It was because we knew we couldn’t keep it, so we did what we thought was the right thing. You never really KNOW if it’s right at the time–most of the advice you get is how to hang on longer. But longer for what???

I think most people follow that conventional advice to their detriment. They hang on until the sherriff comes and puts them out, all the while waiting for a miracle bailout. Even now, many of the loan modications are falling apart. Most people who can’t afford $1500/month can’t afford $1000 either. But sometimes you have to cut your losses and prepare to fight another day.

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Kevin

yea, exactly. That was pretty lucky for you. Some people just don’t know when to get out of something bad so they can start anew.

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Kevin@OutOfYourRut

Didn’t feel lucky at the time! It was one of those things that’s fortunate only in retrospect.

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Kevin

I gotcha. Well at least it was fortunate.

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Derek Sisterhen

This is a very interesting (and timely) post. A lot of folks are learning the hard way that the sage wisdom of buying a house you have to stretch to afford because “home values are going to go up” might be a little outdated.

Unless you pay cash for a house, it’s still a liability. Liability means risk. So I’m with you on the “what if” scenario you play out. However, if someone loses a job and has an emergency fund of six months worth of expenses (including the $1,200 mortgage), then there is plenty of time to make up for the lost income.

This is why becoming free of consumer debt is a critical step before even buying a house – the risk is exceptionally lower. Likewise, if already a homeowner, dumping any outstanding consumer debt has to be the A #1 objective.

My thinking on housing has shifted. Your home is much less an investment (asset) and much more a liability (debt), and to wrap up huge significance in it is to prevent good, clear-headed decision-making should something unfortunate occur.

Great post!

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Kevin

I agree. A home is a big liability. I believe it’s something you really have to be prepared to get into.

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Carol@inthetrenches

A couple thoughts to add to the discussion:
1. People don’t like change forced upon them. It’s almost instinctive to try and hold onto what we consider to be ours when threatened. It’s just a gut reaction which leads to…
2. When a major change comes we often don’t think fast enough. Before we can figure out what is best to do the situation has often snowballed. We try not to make rash decisions but the bills keep coming in.
3. How much was the downpayment on the house? People rightfully want to save any equity or cash outlay they have made.
4. How much would it cost to move and for a replacement dwelling?
But aside from that your point is very well taken and you are absolutely right that we need to put it into dollars and cents. We almost have to separate ourselves from the situation to be able to see it more clearly. When I wrote In The Trenches and the blog I spend much time in talking about the mental side and the need to make quick and early decisions. Change can come seemingly from nowhere and it knocks you off your feet. You have to get back up before you can make any rational decisions. Just personal experience talking and everyones experience is different. That’s why blogs like your’s are so helpful. Gives people ideas and information they can act upon if the situation comes up. Thanks.

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Kevin

Thank you so much. Yea, people are a creature of habit and it’s hard to change what you know sometimes.

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Financial Samurai

I think it is because you don’t own a home. Homeownership is a very personal, and powerful thing.

The house may cost you $500,000 when you buy it, but the feeling you get of “owning” the home is worth WAY beyond what you bought it for. It’s a priceless feeling and signifies that you have arrived.

Trust me on this one. Nobody talks about that amazing feeling after you close.. it’s one of the best in the world. Hence, most will do anything to keep it after living in it for at least 3 years I think.

Best,

Sam

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Kevin

Yea, that’s what I figured. It’s definitely an emotional thing that helps you make ,sometimes, irrational decisions. Hopefully, when I own a home, I won’t have to go through this scenario. Thanks for the comment.

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Jon DeGroff

You’ve made great points! Homeownership has been sold to us as something that is “completely necessary.” Rent is referred to as “throwing money down a hole.” This makes people want to cling to their home even when it becomes unsustainable to live in it.
I remember when my wife and I were moving to our current location. We were getting a nice relocation package from my previous employer, and we were “qualified” for up to a $280,000 mortgage. With my wife and I’s incomes, we could have fairly easily afforded it. Everyone looked at us like we were crazy when we settled on a 3 bedroom home for $71,500 (and the corresponding $511/month pmt).
I was thinking ahead to the “what if’s.”
Well, “what if?” I decided I wanted to leave that job after another year and start my own business? That’s exactly what I did, and that $511 mortgage payment was still very easy to make, even when I didn’t have an income coming in from my business. If we would have had problems with those payments, we would have sold the house and created a solution.
People get married to their homes, they over-loan, and then when times get tough they think that it’s their “right” to stay there. Well, technically it’s not-because if you don’t have the deed, it’s not your home!

Another great blog, Kevin!

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Kevin

Great comment. That’s a great example. People need to learn not to leverage themselves if they don’t have to.

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1milchallenge

Great post. I do think for those who have never bought a home, like Samurai said, the feeling of have a place of your own is indescribable and I think keeping a home when you can’t afford it probably has a lot to do with those emotions.

When we bought the bank was willing to lend $500,000 based on both our incomes. Knowing we planned on a family, we borrowed only what we could easily afford on my husbands wage with no overtime, bonuses or anything. I’d feel sick borrowing to full capacity. We got a modest house and were happy we could sleep knowing we could pay extra into the morty, not stress about not being able to afford it.

I think the whole “rent is dead money” makes it so hard for people who own a home to give it up. Too bad most people can’t look at the rent vs. own argument from all angles not just the dead money vs equity thoughts.

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Kevin

yea, it’s kind of like being hard headed. Emotions are very powerful.

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The Single Saver

Renting the home out would be an acceptable option in this case because the family in the example would still have the option of living in the house again someday should their financial situation improve. Depending on how much equity they have in the house, I can understand not wanting to give up everything they had worked for. Of course, that is assuming they bought a realistically priced house in the first place. Had the home been too much for them in the best of times, it would be foolish to try to keep it.

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investlike1percent

the home is just shelter. there are creative ways of keeping the home like bringing in tenants as you mentioned.

buying a home you can afford seems like the practical thing to do. meaning leaving enough money to set aside for emergency.

in the current recession, we have heard of people living 2 years without the bank doing anything. so its rarely as boom, you lose your house

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