Homeowners, Are You Treading Water?

It seems that all you read about in the news these days is homeowners who are ‘underwater’ on their mortgage, meaning that they owe more than what the house is worth.

I feel bad for those people, of course, but I think that there’s a large group of people that are not getting attention.

No, I’m not talking about those that I would call, for lack of a better term, treading water.

The definition for treading water would be simple. You have equity in your home, but really you don’t.

How’s that possible, you say?  Glad you asked.

I would look at it very simply.  If you are ‘near’ the line where you have equity (anywhere between 0-8%), chances are you’re treading water.

Read moreHomeowners, Are You Treading Water?

You Can Afford A Bigger House, But Should You Buy One?

I’ve seen a lot of articles in the news about how higher priced homes are a great bargain.  This article in Yahoo Finance discusses this trend and points out how higher end homes have fallen in price-per-square-foot more than any other segment of the market during the crash.

A good friend is beginning to think about getting in the housing market, and are considering higher priced property.  The properties that they are looking would have been unaffordable even a couple of years ago, but have now fallen to where they are considering a move to a higher priced property.

They have their finances in order so I’m confident that they would be able to afford the down payment and monthly payments, but it’s still worth considering that even though you can afford a higher priced property, should you?

Here are a few things that I think come to mind that should be considered when you look at the type of property you might buy:

  • Down payment and monthly payment – Make sure that you can afford both the down payment and monthly payment
  • Taxes – Even if your dream home is way lower in price, chances are the taxes to support that house may not have dropped.  Make sure to factor the tax payments in your budget
  • Cash flow – Even if you can afford your dream home, make sure it’s not going to put you in a cash poor position.  There is good, free budgeting software available that can help you make sure things are on track, especially when that time comes to e-file your tax returns.  If you find yourself funneling every dollar into the payments, you might not end up enjoying your dream home as much as you anticipated.
  • Flexibility – Make sure that your payments leave flexibility both for things in your control and out of your control.  If you’d be in trouble if you or your spouse lost your job, you might want to re-consider.  If you might consider going to a single-income household, make sure you’re prepared for this up front.
  • Utilities – A bigger house is going to use more energy.  There are more cubic yards to heat, more lights to keep on, perhaps more yard to water and keep up.
  • Upkeep – Any house is going to require upkeep.  Things will wear down or break.  When it comes time to put on that new roof and replace that carpeting, realize that those things (and many others) will cost a lot more than a more modest house.
  • Opportunity cost – Any extra dollar you spend on your home is money that you can’t use elsewhere.  Make sure you understand and are prepared for that.  You might be standing on the sidelines while people you know are investing in something paying a big return, unable to do so because you don’t have the cash.

Each person and situation is different.  I’m not saying that taking advantage of the real estate market to buy a nice home is right or wrong.  That decision varies with each person and there’s a lot of gray area.  All I’m recommending is to think about things other than price when making your decision.

Don’t Pay For A Bi-Weekly Mortgage Plan

My boss recently bought a house, so quite a few of our work related conversations over the past couple of months have shifted away from work and discussing the various stages of home ownership.

One recent conversation brought to light that it’s probably worth reminding people that it’s generally not a good idea to pay to enroll in the bi-weekly mortgage plan.

Me: How’s everything with the move going?
Boss: Pretty good.  Hey, look at this.  We just closed last week but I already got something from the mortgage company.  They offered this bi-weekly mortgage plan for $295.  It shortens the mortgage time by seven years.
Me: Yeah, I get those all the time.
Boss: I was just doing the math and it looks like all they’re doing is making twenty-six “half” deductions instead of twelve “full” deductions.  That basically means that they’re just taking an extra payment a year, right?
Me: You got it.
Boss (getting excited now): So can’t I just add extra to my payment each month and accomplish the same thing?
Me: Yep.
Boss: So, why would anybody pay $295 for this?
Me: Because a lot of people see the savings, figure a $295 investment is worth it, but don’t realize that they can accomplish the same thing without paying a dime for it.
Boss: Sneaky.
Me: It sure is!

My boss and many others have figured out on their own that paying for the bi-weekly plan is simply not worth it.  If you want to do the same thing, all you have to do is:

  1. Identify what your monthly payment is for principal and interest only.  This means that if part of your payment consists of an ‘escrow’ amount to cover such things as property taxes, insurance or association fees, you should exclude this.
  2. Divide the amount above by twelve.
  3. Add this payment amount to your monthly payment.  If possible, make sure you specify this as an extra payment towards principal.  Also, make sure that you don’t have a pre-payment penalty (most standard mortgages don’t).
  4. Enjoy the shorter mortgage pay-off time AND the $295 you saved by not letting the bank do this for you.

Example:
Your monthly mortgage payment is $1500 broken down by:
Principal and interest: $1200
Escrow (taxes / insurance): $300

You only want to concentrate on the principal and interest, so your focus is on the $1200.

Divide that by twelve and you end up with $100. That’s going to be your ‘extra’ payment per month.

Contact the bank (or logon to your account if your bank lets you) and add $100 per month to your payment, specifying it to go towards principal.

Your payment will now be $1600 per month:
Principal and interest: $1200
Extra principal payment: $100
Escrow (taxes / insurance): $300

We aren’t doing this at the moment because we’re redirecting any extra money we have towards other things like paying down student loan debt and saving for some home renovations, but should this be a priority, this will be the formula we’ll follow!

Redecorating Your Home Without Breaking the Bank

This is a guest post by Mike Collins. Check out his blog at SavingMoneyToday.net and discover many more tips for saving money and dealing with debt.
Do you ever get sick of coming home and seeing the same old rooms day after day?  Wish you could redecorate your home but think you can’t afford it?

Well think again.  There are many easy ways to redecorate your home even if you’re on a tight budget.  Let’s brainstorm a few ideas…

It costs nothing to rearrange the furniture you already have.   Simply moving things around a little can create a whole new look and it won’t even cost you a dime.  And before you decide to ditch your old furniture altogether, try adding some slipcovers and throw pillows to make it look like something new.

Painting is another inexpensive way to update your home.  Most do it yourselfers can handle painting by themselves as long as the walls and ceilings are in good shape, and spackling and sanding can be mastered with a little practice.  Trust me, I’ve done a ton of painting over the last few years and it has saved me thousands of dollars that would have gone to a professional.

Try replacing your boring old lighting fixtures with something new.  Installing a new ceiling fan or chandelier will cost you several hundred dollars if you have an electrician do it.  Or if you’re handy and feel comfortable doing it yourself you’ll only have to pay the price of the new fixture.

If you’re feeling brave, a new floor will really give your place a new look.  It may take some elbow grease, but most do it yourselfers can install hard wood floors or vinyl tiles themselves.  When we bought our house the kitchen floor was an ugly white tile that was all scuffed and looked just rotten.  Every day my wife told me how much she hated it because no matter how much she scrubbed it always looked dirty.  So with my buddy’s help we put down new vinyl kitchen tile ourselves.  It took the better part of a day but it looks fantastic and we only had to pay for the materials.

Of course if that sounds like too much work for you, you can always start out with smaller projects.  Try installing new switch plates or changing the handles on your kitchen cabinets.  Hang new curtains in the window.  Pick up some new candles or a painting at a yard sale.  Even small changes such as these can have a huge impact.

Detroit Wants To Shrink Itself, What Do You Think?

Detroit has been in a population decline for decades and decades.  Simply put, the city is now too big for itself.

The new mayor has proposed shrinking the footprint of Detroit by identifying areas which are currently sparsely populated, and relocating these residents to other areas.  The goal would be to create denser neighborhoods, which could then receive the concentration of services.

Right now, the city just can’t sustain itself.  The city once had about 2,000,000 residents, and now has less than half that.  Still, police must patrol all areas. Roads must be maintained.  Garbage pickup still has to cover all areas.

But with the population decline, the city can’t afford to offer these services across the board.  It is simply unsustainable.

It’s going to be a long road ahead if the city does move forward with this.  I’m not sure that it can actually succeed, but it’s a unique approach to a problem that has been around for decades and doesn’t seem to show any signs of ending soon.

Many of us have looked at our finances and taken measures to simplify them.  We cut out ‘lattes’, we eliminate or reduce debt, we cut spending where we can.  It’s interesting to see a city actually try to do such a thing on such a grand scale.

I know many people across the country see Detroit as a hellhole, and there are areas where this is indeed the case.  Still, the city and the surrounding area are full of good people, hard workers, great landmarks, and as one of the residents of the surrounding area, I continually hope that Detroit can someday right the ship.

It often looks bleak but when I look at the fact that many people and families have turned their own situations around, it gives me hope.

Why I Think Housing Stands A Chance

One of my new blog reads is a personal finance blog called 20s Money.  It’s centered around personal finance for people, as you might guess, in their 20s.  Even though I’m in my 30s, I still enjoy it and think it’s a very well written blog that’s fun and enjoyable to read.I’m pretty sure that it will get moved to my blog roll next time I make some changes (hopefully in the next few weeks).

Kevin wrote a post yesterday where he expressed his opinion that Housing Isn’t Going to Rebound.  It goes without saying that the housing market sucks and that pretty much everybody that owns a home (including me) has seen the value of their home plunge.

So, I agree with Kevin on that point.  I also agree that we will not again see ‘values shoot through the roof’ again in our lifetime.  In fact, I think that’s a good thing because now that we’ve seen what happens when they do, that type of explosion does more harm than good.

Since, as you can probably surmise from the title of Kevin’s post, he feels the picture on housing is bleak, I thought I’d take a look and see if there’s reason for a little more optimistic view.

I think that there is.

Let me start off by saying that in order to judge housing and whether it’s worth getting into at any time, you have to reset your expectations.  If your measuring stick is the gains we saw in the last decade, or even that housing will be a big moneymaker, then I’ll agree that there’s no hope in housing for you.  Why?  Because those expectations are out the window.

But, if you’ve reset your expectations a bit, here’s a few reasons why I think there’s hope:

  1. Not everybody wants to rent – There are people who don’t look at just the financial numbers associated with buying a house, but they look at the fact that they don’t want to be renters or be around renters for their entire lives.  I’ve lived in apartments in the past, and while I had some great times there, I realized that it wasn’t the lifestyle I wanted to live in, especially as I looked ahead to when I might have a family (which I now do).  For some, renting is great, and if that’s you, I commend you.  However, there’s a big portion of the population that wants to be in something that they call their own and who want to be around others with the same mindset.  For this portion of the population, home ownership will have an appeal.
  2. There’s a built in incentive to owning a home – Inflation, in the long term, actually provides an incentive for home ownership.  How so?  It’s simple.  Right now, if you’re looking at the opportunity to buy vs. rent, your monthly payment is probably a big factor in making that decision.  There is certainly the down payment element to, which I’ll get to in a minute, but focusing on the monthly payment for a second, here’s what you might find.  The buyer might be faced with a payment of $1,000 where the renter gets a similar place for $800.  So, renting is clearly favorable, right?  Well, for now it is.  But, assuming the buyer got a thirty year mortgage, what that means is that their loan payment will be $1,000 for the next thirty years.  But, renters typically only lock in for a year.  So, if inflation goes up, that rental might cost $825 next year, $850 the year after, $900 the year after.  At a certain point, the person paying rent will actually start paying more than the renter, where inflation is ‘protecting’, if you will, the payment of the buyer.
  3. We’re starting to save more – People are finally getting the hint that holding lots and lots of debt with nothing to show for it is not a good financial strategy.  As such, people are paying down debt and trying to put money away.  Since we’re still in the middle of a recession, this isn’t going as well as it could, but I’m optimistic that even baby steps will help.  When this happens, eventually people will have money to afford a down payment.  As (hopefully) more and more people shed credit card debt and instead build a pool of money, this could open the door for more and more people to purchase homes.  Actually, this isn’t a new idea, because until the 1980’s or 1990’s, saving up a down payment on a house was the way it was done.

I know that there will be people that remain pessimistic.  I also know that some people will probably say my possibilities are unrealistic.  That’s all fine and good if you do, but I’m just putting out there some possibilities that I see that I feel are realistic and, if they happened to play out, would lead to some cautious optimism in regards to the housing market prospects.

I will be the first to admit that things do look bleak, but I also hold in mind the old saying that it’s often darkest just before dawn.

What do you think?

Did The Banks Force You To Sign Your Mortgage?

My Two Dollars posted an article last week that made me see red.  In the article, David (the author) said that he’s changed his mind and that he now thinks that it’s OK to walk away from your mortgage if your property value has declined to where you’re underwater on your mortgage.

Even if you can afford to pay.

Huh?

His argument (and he links back to another article in the NY Times that advocates the entire thing) is that the banks have been unwilling to help the borrowers out who they know are underwater, so turning around and ‘sticking’ it back to the banks is fair play.

I think that’s baloney.  I actually think it’s a lot more than that, but the words I’d like to use are ones that I try to stay away from in a public blog.

First, two wrongs don’t make a right.  Just because the banks are being ‘big meanies’ doesn’t mean that walking away will somehow wrong that right.  There are other ways to go about dealing with this issue.  Keep working with your bank.  Try to sell your house.  Or, keep making the payments.  I mean, to act all flabbergasted that the banks are not jumping up and down to work with you, are you serious?

If anybody really thought that the banks were their buddies just because they acted all buddy-buddy to get a mortgage deal signed, well, give me a break.  Banks are in the business to make money, and they do so largely in part by signing loans.  Why do you think that the bank owes it to you?  Let me ask this of anybody who thinks that it’s OK to walk away: If the value of your home had continued to go up and you sold it for a nice profit, would you have ‘shared’ that profit with the bank?  Didn’t think so, but how is anybody throwing a tantrum because the bank won’t ‘work with them’ any different?

Second, nobody forced you to sign the papers in the first place, did they?  As far as I know, a lot of people signed a lot of papers agreeing to pay a lot of money for houses that, as it turns out, were not going to hold their value.  While I agree that this is bad news, the fact is that there was nobody from the banks or the mortgage company holding a gun to anybody’s head (except maybe on the Sopranos).

Let’s face it, many of the same people that bought houses inflated in value was because they saw it as an investment.  Just like any investment, a stock, a bond, whatever…there’s a risk.  But, instead of these people dealing with their losses like they would in any other investment, they would now rather  leave someone else to deal with their losses.

That’s baloney.

Third, the short-sightedness is unbelievable in the logic that David uses. Why? Because banks aren’t the only ones that lose here.  Yes, you might be ‘sticking it to the bank, but let’s think for a minute of all the other people, real people that aren’t hiding behind corporations or skyscrapers, that get screwed every time someone walks away that could afford to keep paying:

  • Neighbors – Anybody around the vacant home now has to deal with an empty house that will, more often than not, turn into an eyesore as the lawn goes uncut, the snow doesn’t get shoveled, and gets open to all sorts of problems such as infestation, scavenging, broken pipes, or any other number of things that even a few months of neglect can bring on.  And usually these sit for more than just a few months.
  • Neighbors – Yes, I’ll mention the neighbors again because now what happens is that the bank will have to foreclose and this will usually lead to lower values in the neighborhood.  So, every one of your neighbors watches their own home value drop when you walk away.  You think the bank is the one eating your loss, but chances are your neighbors are even more.
  • The municipality you live in – I’m guessing that when you walk away, you’re going to stop paying the property taxes.  Since most municipalities rely on property tax collections to fund their operations, you’re leaving them with less for as long as the foreclosure process goes on.  That means less money to provide police and fire safety, less money to keep up infrastructure such as roads and other essential services in a time when many cities are barely scraping by as it is.
  • The kids in your school district – Where I come from, property taxes also fund the public school system.  You leave, and there’s less money to fund the schools.  At least here in Michigan, educational spending has already been cut a few times, largely in part because of declining property values AND less property taxes collected because of people who enter foreclosure.  To think that there are people contributing to this willingly is simply nauseating to me.

I wonder if anybody that walks away simply to screw the bank  looks in their rearview mirror as they’re driving away and sees all the rest that they’re leaving behind.  Because, there are a lot of other people affected by that selfish decision, not just the bank.

Let’s also mention the circular effect. As I mentioned, walking away typically leads to a foreclosure, which more often than not leads to a decline in the home value on the abandoned property and all the properties around this.  These declining values will then lower values so that someone else goes underwater.  Then, they walk away and that depresses the value even further, which leads to someone else walking away, and so on and so forth.

When does it end?  Are we supposed to become a nation of renters because if things kept going and going, that’s the end game.

I think I’ll pass on that one, thanks.

If we want this real estate mess to stop, there has to be personal responsibility.  There has to be sacrifice in order for this cycle to stop and for us to start the process of stabilizing the real estate market for good.  It amazes me when I see blog posts and news stories like David’s who either want to delay this process, or want to make it someone else’s problem.  In the end, that’s all it’s doing every time someone walks away is making it someone else’s problem.

Let me put a disclaimer or clarification on all this.  If there are circumstances where you can’t afford your house, say you lost your job or you have a medical expense, or something else that’s put your finances in the tank, none of what I said applies to you.  I understand there are thousands of people who had to walk away from their homes because they had no other choice.  I’m not chastising you in this article.  What my comments and my anger are centered around are those people who still have their jobs, who can still afford the payments, but choose to consider not making them simply because things didn’t work out like they planned.

One of my favorite bloggers is Funny About Money.  Funny lives in Arizona and until the end of 2009, she worked for Arizona State University, but found herself out of a job due to budget cuts, and is now effectively retired.  She now lives on her banked time and unemployment, and will soon be living on Social Security and a small-to-modest retirement account.  She will be scraping by.

She also has a house that is worth a lot less than she paid for it a few years ago.  Yet, she plans on staying there and in all the months that I’ve read her blog, she’s never once seriously considered walking away.  It would be the easy thing to do.  It would probably help her out.  But, she’s never considered it because she knows it would be the wrong thing to do.  I feel bad because she’s definitely feeling a big impact in her life as a result of the real estate declines.  But, I’m proud of her because she makes the right choice, even if it’s the difficult one.

If someone in her position can make the right decision, even though it puts her in a tough circumstance, why is it so hard for others to comprehend doing the right thing even if it means sacrificing?  People in generations past made a lot of sacrifices that, while they were tough, led to opportunity.  Now, people want the opportunity without the sacrifice, and there are way too many people encouraging this mentality.

So, please, can we stop already with the sympathy to those who choose to walk away from their mortgages even though they can afford them? OK?  It’s baloney!