7 What Kind Of Math Is Used In Your Car Baby Boomers – Time to Walk Away From Your Mortgage?

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Baby Boomers – Time to Walk Away From Your Mortgage?

Many baby boomers have seen the equity in their homes evaporate in a matter of months. What was supposed to be a nice retirement cushion is simply gone. Even worse, many boomers now find themselves in a situation where they owe more on their property than it’s worth. They can’t sell their homes: there are no buyers, no refinancing, and the lender won’t accept a short sale. Under these circumstances, does it make sense to mail the house keys to the lender and just walk away?

In some cases, the answer is “Yes.” But the situation should be carefully scrutinized before taking this step.

First of all, why would anyone take such drastic measures? Well, if you’re a baby boomer living on a fixed income who’s been struggling to keep up with your monthly mortgage payments, maybe your dollars can go a little further if you take that burden off yourself. What if you could rent or lease a home with less out-of-pocket expenses? Does it make sense then?

And there are baby boomers who want to retire, but can’t do it as long as they have to feed a large mortgage. Maybe their kids have moved out and are empty nesters in a big house. At some point, you have to ask yourself, “Why am I still living under the financial burden of this mortgage for a home that has no benefit to me at this point in my life?” If you’re down with your mortgages, the decision becomes clear after a few moments of reflection.

Those who have already retired, or are retiring, need to take a 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 you with some money for fun? If not, where can you cut costs? More often than not, housing is the only area where cuts can be made to earn extra dollars.

That said, it’s not worth leaving the house if any of the following conditions apply:

  • You still have equity in the property.
  • You are under 55 and have “financial recovery” time on your side.
  • The terms of your mortgage and/or state law allow the lender to look to 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 with at least a break-even point, taking into account all expenses (including taxes and insurance).
  • Chances are you will need a good credit score at some point in the next five years.

Even if none of the above apply, you still need to do the math to make sure “walking away” is the right choice for you. After all, you don’t want to leave anything on the table.

For example, let’s say your home had a market value of $450,000 in 2006 before the big slide started. But now, homes similar to your block are selling out of foreclosure at $200,000. You basically lost $250,000 in equity.

And let’s say you’re also upside down with your mortgage. That is, your Deeds of Trust balances total $270,000. So the current market value of your home is $70,000 less than the amount you owe. Will your home ever regain all or part of its lost value? How long will it take to break even on mortgages? Is it worth holding on to in hopes of getting some equity back? Let’s see:

  • Let’s assume that the housing market bottoms out in late 2009 and that home values ​​begin to rise gradually again in late 2010, say at an annual rate of five percent. Well, that means that at its current market value, your home will appreciate at a rate of about $10,000 per year (ignoring compound interest). So it would take roughly seven years (because there is no appreciation during 2009-2010) of mortgage, tax and insurance payments to break even where you owe as much on your property as it is worth.
  • At five percent annual appreciation, it will take approximately 23 to 25 years to recover the equity from the $250,000 loss. If you take three years beyond the breakeven point (7 years), you will gain about $15,000 in appreciation. However, this is not enough to cover closing costs if you sold the property after ten years.

So, are you willing to make mortgage payments, taxes, and insurance (plus maintenance) for ten years or so just so you can 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’re sure you can put a comfortable roof over your head for less than what you’re paying for your home now, it might make financial sense to leave. Let’s say your current cost of ownership is $1,500 per month for mortgage payments and $400 per month for taxes, insurance and any association fees. That’s $1,900 in out-of-pocket expenses every month!

Now, if you can rent an equivalent or downsized house (or one in a different location of your choice) for $1,000 a month, that would mean about $900 more each month in disposable income! You’d still have some insurance cost under a home policy, but it probably wouldn’t be more than $400 a year. Think how much more comfortable your life could be with that extra income in your pocket and less stress!

And at your age, don’t worry about damaging your credit history. You’ll still get credit card offers in the mail – they never stop, the rates just go up. But who needs them anyway! Living debt free is a wonderful feeling.

Keep in mind that having the financial freedom to do what you really want, instead of working and sweating to feed a mortgage that no longer makes sense, is a precious thing when you’re a baby boomer. If it is necessary to change your lifestyle to achieve this, it is a small price to pay as long as you can still live comfortably and do what you want for the rest of your life.

A word of caution. If you decide to take action, line up your new lease and make major purchases (eg, a new car) before your credit history runs out. Be smart about it. Remember that no one is watching 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 your personal circumstances. Deciding whether to leave your home is no small task. It deserves careful attention and planning. But it might just be the right choice for you.

Now, if you can rent an equivalent or downsized house (or one in a different location of your choice) for $1,000 a month, that would mean about $900 more each month in disposable income. You’d still have some insurance cost under a home policy, but it probably wouldn’t be more than $400 a year. Think how much more comfortable your life could be with that extra income in your pocket and less stress!

And at your age, don’t worry about damaging your credit history. You’ll still get credit card offers in the mail – they never stop, the rates just go up. But who needs them anyway! Living debt free is a wonderful feeling.

Keep in mind that having the financial freedom to do what you really want, instead of working and sweating to feed a mortgage that no longer makes sense, is a precious thing when you’re a baby boomer. If it is necessary to change your lifestyle to achieve this, it is a small price to pay as long as you can still live comfortably and do what you want for the rest of your life.

A word of caution. If you decide to take action, line up your new lease and make major purchases (eg, a new car) before your credit history runs out. Be smart about it. Remember that no one is watching 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 your personal circumstances. Deciding whether to leave your home is no small task. It deserves careful attention and planning. But it might just be the right choice for you.

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