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Many
baby boomers have seen the equity in their homes evaporate
in a matter of months. What was supposed to be a nice
cushion for retirement has simply disappeared. Worse yet,
many boomers now find themselves in a situation where they
owe more on their property than it is worth. They can’t sell
their homes – there are no buyers, no refinancing and the
lender won’t take a short sale. Under these circumstances,
does it make sense to put your house keys in the mail to the
lender and just walk away?
In some cases, the answer is “Yes.” But the situation should
be carefully scrutinized before taking that step.
First, why would someone take such drastic action? Well, if
you are a baby boomer living on a fixed income who has been
straining to keep up with monthly mortgage payments, perhaps
your dollars can go further if you get out from under that
burden. What if you could rent or lease a home with less out
of pocket expense – does it make sense then?
And there are baby boomers who want to retire, but cannot do
so as long as they must feed a big mortgage. Perhaps their
children have moved away and they are empty nesters in a
large home. At some point, you have to ask yourself, “Why am
I continuing to live under the financial burden of this
mortgage for a home that has no benefit to me at this point
in my life?” If you are upside down on your mortgage(s), the
decision becomes clear after just a few moments of
reflection.
Those who have already retired, or are coming up on
retirement, need to step back and take a hard look at their
financial situation. When you add up all your monthly bills,
does your current – or anticipated - income cover them and
leave some bucks for fun? If not, where can you cut
expenses? Quite often, housing is the only area where
cutbacks can be made to gain additional dollars.
That said, it does not pay to walk away your home if any of
the following conditions apply:
• You still have equity in the property.
• You are under the age of 55 and have “economic
recovery” time on your side.
• The terms of your mortgage and/or state law
allow the lender to pursue other assets to settle a
debt.
• A short sale is possible.
• The benefits of continuing to receive tax
deductions outweigh other considerations for your
circumstances.
• Your home can be rented out on at least a
break-even basis, taking into account all expenses
(including taxes and insurance).
• You are likely to need a good credit score
sometime within the next five years.
Even
if none of the above applies, you still need to do the math
to ensure “walking away” is the right choice for you. After
all, you don’t want to leave anything on the table.
For example, suppose your home had a market value of
$450,000 in 2006 before the big slide began. But now,
similar homes on your block are selling out of foreclosure
at $200,000. You have essentially lost $250,000 in equity.
And suppose you are also upside down on your mortgage. That
is, the balances on your trust deeds total $270,000. Thus,
the current market value of your home is $70,000 less than
the amount you owe on it. Will your home one day recover all
or some of its lost value? How long will it take to get to a
break-even point on the mortgage(s)? Is it worthwhile to
stick it out in hopes of regaining some equity? Let’s see:
• Assume the real estate market bottoms out by the
end of 2009 and home values begin to gradually increase
again by the end of 2010, say at an annual rate of five
percent. Well, that means at its current market value,
your home will appreciate at the rate of about $10,000
annually (ignoring compounding interest). Thus it would
take roughly seven years (because there is no
appreciation during 2009-2010) of mortgage, tax and
insurance payments to just get back to a break-even
situation where you owe as much on your property as it
is worth.
• At a five-percent annual appreciation, it will
take roughly 23 to 25 years to recover your loss equity
of $250,000. If you hang on for three years beyond the
break-even point (7 years), then you would gain about
$15,000 in appreciation. However, this is not enough to
even cover closing costs if you sold the property at the
end of ten years.
So,
are you willing to make mortgage, taxes and insurance
payments (plus upkeep) for another ten years or so just to
be able to sell the property without damaging your credit?
How much is ten years of your life worth to you?
Here is the key to making your decision. If you are sure you
can put a comfortable roof over your head for less than you
are now paying for home ownership, then it may make economic
sense to walk away. Let’s say your current cost of ownership
is $1,500 monthly for mortgage payments and $400 monthly for
taxes, insurance and any association dues. That’s $1,900 in
out-of-pocket expenses every month!
Now if you can lease an equivalent or downsized home (or one
in a different location of your choice) for $1,000 per
month, that would mean about $900 more each month in
spendable income! You would still have some insurance cost
under a household policy, but this probably would not exceed
$400 annually. Think how much more comfortable your life
could be with that additional income in your pocket and less
stress!
And at your age, don’t worry about blemishing your credit
record. You’ll still get credit card offers in the mail –
they never stop, the rates just get higher. But who needs
them anyhow! Living debt free is a wonderful feeling.
Bear in mind that having the financial freedom to do what
you really want to, versus working and sweating to feed a
mortgage that no longer makes sense, is a precious thing
when you are a baby boomer. If changing your lifestyle is
necessary to achieve that, it is a small price to pay as
long as you can still live comfortably and do what you want
during your remaining lifetime.
A word of caution. If you do decide to take action, then
line up your new rental and make any large purchases (e.g.,
a new car) before your credit history is dinged. Be smart
about it. Remember, no one is looking out for you, but you.
So baby boomers, take stock of your own situation. You are
approaching the last third of your life and the game has
changed. Sit down and do the math for own personal
circumstances. Deciding whether to walk away from your home
is no small thing. It deserves careful consideration and
planning. But it just may be the right choice for you.
About The Author
Al Kernek is a Internet marketing consultant, author and Baby Boomer. Learn more about issues facing Baby Boomers seeking to retire on a fixed income at www.BabyBoomerLifeboat.com which is also an online portal to Websites containing valuable information and resources for Baby Boomers. |
