Don’t we all love the home we live in? Our kids are in established schools, we have lots of memories in the house, we love our neighbors, we’ve redecorated. The list goes on. Moving would be hard. Letting our neighbors know that we are facing financial difficulty would also be really hard.
So if you are faced with a negative equity position in the current home you live in – you owe $400,000 and it’s worth $200,000, which is common in many San Diego neighborhoods where we work – there is both an emotional and financial decision to be made. Many who are facing foreclosure do not want to give up the house, yet the cost of keeping it could set you back for years to come, rather than just selling it via a short sale in San Diego. The pre-foreclosure market has heated up and ironically it may save you $500,000 to sell your home rather than keep it.
A loan modification is attractive for many people because of the emotion attachment to the house. After all, it is your home, not just some investment to be dumped at a whim. But what if I told you that financially it will cost you about a half a million dollars just to hold that home instead of selling it through a short sale?
Let’s do the math.
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Your house is in San Diego, California and your loan is for $400,000.
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It was originated in July of 2007 when you bought your house in Carlsbad, California at a 6.5% fully amortizing rate (meaning you are paying down the loan).
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If it is a 30 year loan you will pay $510,177 in interest alone for the loan when it pays off in 2037.
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This coupled with paying all the principal would cost you $910,177 to payoff the loan.
That’s a lot of money! If you needed to sell the house before the paydown of the loan to sell it at today’s price in San Diego you wouldn’t be able to do that until 2027 – that’s 18 years from now! Hopefully prices will go up in San Diego in 18 years, but what if you needed to sell in 5 years? In 5 years you would still owe $365,000 – that $162,000 in negative equity to be made up in a very short period of time.
What if lenders are not granting short sales at that time? You will still not have made any money on that house, you will have paid out $30,339 in interest and principal – AND YOU WILL GET NONE OF IT BACK. The bank still might take your home.
So let’s look at the scenario where you got out today in a short sale, and bought another house in 1 year, which is possible if you are aggressive with your credit repair.
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Sell the house for $200,000 – that’s $200,000 forgiven.
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Expect a credit hit, but in one year houses will still be dirt cheap.
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In San Diego houses are still experiencing a decline in prices. So say in one year that house is now worth $175,000 and you buy a similar one in the same neighborhood with 10% down.
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Your loan would be $157,500.
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For comparison sake let’s assume the interest is 6.5%, fully amortizing for 30 years.
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Your total interest paid for the life of the loan would only be $200,244.
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To pay off the entire loan over 30 years you would end up paying $357,244.
That’s a savings of $552,993.00 – a half a million dollars!
So by moving on, particularly if you are facing a financial difficulty, you will not only get out of your negative equity situation (and essentially be losing money), but you will save over $500,000 by getting out and getting back in.
What would you do with that money? Pay for college education for your kids? Save up for retirement? Pay off other debts?
Let me ask you, does it financially make sense to stay in the home? I know you love it, but separate out the emotions from the finances.
What ultimately will be better for you?
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