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Pay the mortgage or the credit cards? Which Way to Go ?

By Edited Apr 20, 2016 0 1

My best friend from college and I are both on our second divorce. We got kids who are up and out, and we're staring at houses we can neither sell not afford to fix. What do you do with that big old house once the husband and kids are gone? What do you do with it if your job prospects are dwindling, and money is tight? When does it make sense to bail and when does it make sense to pay? Here are some parameters.

A mortgage adjustment. If you really need that house to live in, and you're not upside down in the equity, AND you have a steady job a mortgage adjustment is not a bad idea. But Beware, even if the monthly payment is lowered, if the length of the loan is drawn out - you will pay much more interest over the life of the loan. Is it worth it? Well, you have to live somewhere, only you can answer is the hassle to walk away and move somewhere is trumps the amount of extra interest you'll owe to stay in the house.

Option two, for myself, I wasn't upside in my mortgage, I had a nice low flat rate, and the house is worth more than what I owe. It was just more house than I needed for myself and no one wanted to buy it from me. I ended up renting the house. And moving into a room in a house temporarily. While it smarts to be 44 and live in such reduced circumstances, I DO believe that in 5 years or less I'll be able to sell the house at a profit. In the meantime I've made every payment on time. Even if you have to take a small loss by renting it, if renting it enables you to make the mortgage you can preserve your credit. Credit is worth preserving, if you go to rent an apartment credit checks are often made. Also if you lose your job it's good to have a credit card. Also the amount you take as a loss every month you can write off as a business loss on your taxes.

My friend was able to rent her house at the same amount as her mortgage payment. Of course that's even better. She moved into a friend's house where in lieu of rent she's laying tile and putting up drywall. If you're handy this creates a much bigger net savings. Another option is to look for house sitting jobs, or care taking jobs. Lastly, you might consider staying in your house and renting one room of it.

When does it make sense to stop paying the mortgage? When the house is just not going to recoup its value. If you took out a loan when the house was valued at $600,000, and how your house is only worth $250,ooo, you are not going to see the value again in 5 or 10 years. Even if you CAN afford the monthly payment, it doesn't make a lot of sense to pay it. My friends in this situation went and bought a 5th wheel while their credit was still pristine. As soon as the loan was completed on the 5th wheel, they moved into it and quit paying their mortgage, allowing it to go to foreclosure. Don't stop paying your mortgage until you've figured out where you're going to live after. It can be very hard to find an apartment with bad credit and your credit will be bad, very bad, if you walk away from your house.

So you're upside down on your house AND you have credit card debt - which do you pay? For years bankers believed people would pay their house payment first. That is why traditionally real estate interest rates were lower than unsecured debt. However, if you know you owe more on your house than its worth, and you plan on walking away from it - its only good common sense to pay down your credit cards. Use all the money you are saving on NOT paying that mortgage to get your credit cards to zero before the bank evicts you. You are going to need those credit cards later. And after your credit tanks, you won't be able to expect to qualify for any new ones.

The eviction process slow but grueling. Don't expect it to be pain free even if you are deliberately walking away from the house. Bankers are sad when they don't get their money. Collection agencies will call and certified letters will be sent. It can be stressful on families. Just remember to stay the course and stay focused. If they offer you a refinance at any point that makes sense, be sure to consider it. But once again, let it make sense, don't lengthen your loan period to an absurd amount. See if the principle can be reduced.

With as many people who have been hurt in this recession, sometimes you can get lucky. I have a friend who received a six thousand dollar bonus for getting out of his house in two weeks. If wasn't easy. His credit was bad, and he didn't have time to wait on a management company to approve him but through word of mouth we were able to find him a place. It took six guys and we were moving in the middle of a snow storm, but we completed the task.



Jun 24, 2010 8:34pm
Thank you for an informative piece on a very tough subject.
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