Every where you turn there’s a new mortgage program out there for people unable to afford their mortgage for a variety of reasons.  Homeowners are spread thin, often a mile wide and an inch deep when trying to cover all of the costs associated with paying a mortgage and owning a home.  These include:

• Mortgage
• Home owner’s Insurance
• Property Taxes
• Utilities
• HOA fees
• Maintenance fees
• Condo fees

So what happens when after paying all of the above-mentioned fees the value of your home tanks to 50% of what you paid for it?  Should you continue paying into an investment that is essentially worthless?  Or should you be able to give it back to the bank in exchange for being released from the loan while taking a hit on your credit report?  What if you can afford the payments but you don’t feel that the investment is worth it to continue making payments?

Hard Questions Invariably Bring Hard Answers

This is the other side of the debate that no one really talks about. The homeowners who can afford the home, but plan to strategically default due to the declining value since the beginning of the recession.

The New Yorker published a piece, Living By Default  by James Surowiecki which ever so neatly delved into this issue: (skim the bold font for a quicker read)

“It is now generally accepted that when it’s economically irrational for a company to keep paying its debts it will try to renegotiate them or, failing that, default. For creditors, that’s just the price of business. But when it comes to another set of borrowers the norms are very different. The bursting of the housing bubble has left millions of homeowners across the country owing more than their homes are worth. In some areas, well over half of mortgages are underwater, many so deeply that people owe forty or fifty per cent more than the value of their homes.

In other words, a good percentage of Americans are in much the same position as American Airlines: they can still pay their debts, but doing so is like setting a pile of money on fire every month.These people have no hope of ever making a return on their investment in their homes. So for many of them the rational solution would be a “strategic default”—walking away from the mortgage and letting the bank take the house. Yet the vast majority of underwater borrowers keep faithfully paying their mortgages; studies suggest that perhaps only a quarter of all foreclosures are strategic. Given how much housing prices have fallen, the question is why more people aren’t just walking away.

Paying your debts is, as a rule, a good thing. But the double standard here is obvious and offensive. Homeowners are getting lambasted for doing what companies do on a regular basis. Walking away from real-estate obligations in particular is common in the corporate world, and real-estate developers are notorious for abandoning properties that no longer make economic sense. Sometimes the hypocrisy is staggering: last winter, the Mortgage Bankers Association—the very body whose president attacked defaulters for betraying their families and their communities—got its creditors to let it do a short sale of its headquarters, dumping it for thirty-four million dollars less than the value of the building’s mortgage.

When it comes to debt, then, the corporate attitude is do as I say, not as I do. And, while homeowners are cautioned to think of more than the bottom line, banks, naturally, have done business in coldly rational terms. They could have helped keep people in their homes by writing down mortgages (the equivalent of the restructuring that American Airlines’ debt holders will now be confronting)

So far, banks have been partially insulated from the consequences of those bad decisions, because Americans have been so obliging about paying off overinflated mortgages. Strategic defaults would help distribute the pain more evenly and, if they became more common, would force lenders to be more responsible in the future. It’s also possible that a wave of strategic defaults—a De-Occupy Your House movement—would get banks to take mortgage modification more seriously, which would be all for the better. The truth is that banks have been relying on homeowners to do the right thing. It might be time for homeowners to do the smart thing instead. 

What would a great argument be without opposing, yet valid viewpoints? 

Obviously there are two sides to this debate:  Strategic homeowners who see this as a business decision vs homeowners who feel a moral obligation to continue throwing good money after bad money.   Who wins?  Who is right given the above-mentioned factors?

Felix Salmon from Reuters.com poses an interesting counterpoint to the New Yorker’s assertion that more homeowners should strategically default in order to level the playing field:

“I agree wholeheartedly with Jim Surowiecki’s sentiments this week about strategic default and the way in which it’s entirely rational for homeowners to walk away from their underwater mortgages. But I think he soft-pedals the consequences of what he calls “a De-Occupy Your House movement”

I’m not convinced that a world where homeowners mark their homes to market is an obvious improvement on the status quo ante — even though I’m wholly convinced that in any given case, it’s entirely rational for homeowners to walk away from their underwater houses. The question, of course, is whether we can ever return to the status quo ante.

Let’s say that you’re significantly underwater on your mortgage and you don’t have much in the way of savings. Does it then make sense to say that you’re insolvent? Historically, homeowners never thought that way — the mortgage was a monthly payment they made to stay in their home, and their home was a place to live rather than a financial asset.

If we move to a world where houses do become financial assets, that might be a good thing. But let’s be honest about what such a move entails: a large decrease in home ownership. It’s not sensible, on a financial level, to have so much of your net worth tied up in one illiquid asset. So if homes are marked to market, they become attractive mainly to landlords who will in turn rent them out to the rest of us.

If Surowiecki wants millions of Americans to walk away from their underwater mortgages, I hope he knows where the buyers of those homes are going to be found. Because if they don’t appear, we could have another massive housing crash and another huge recession.”

Richard Barrington then chimes in with the unintended consequences of the “De-Occupy Your Home” movement described by the New Yorker:

To really understand the unintended consequences of the Occupy Our Homes movement, you have to think of the people on the other side of the issue. After all, it’s not just banks that are hurt when people fail to meet mortgage obligations. Other victims could include:

1. Future mortgage borrowers. Especially at current mortgage rates, banks have little enough incentive to make new loans these days. If they are blocked from collecting on their loans, future borrowers can expect mortgages to be more expensive and/or harder to obtain.
2. Current homeowners. For the same reason as the above, the actions of Occupy Our Homes may make it tougher for current homeowners to refinance their homes. Ironically, the more homeowners can take advantage of current mortgage rates, the fewer would have to face foreclosure.
3. Depositors. Low interest rates on savings accounts and other deposits are partly the result of weak profits in the lending business. Erode those profits even more, and you can forget about seeing those interest rates rise anytime soon.
4. Bank shareholders. No, don’t think about rich one-percenters. More likely, bank shareholders are pensions and 401k plans, whose participants are ordinary people. When borrowers don’t meet loan obligations, those ordinary shareholders can take the hit.

In short, the Occupy Our Homes movement seems to demonstrate that good intentions don’t always make for a good cause.

All three are very rich and valid perspectives which make for a hearty debate around whether or not one should strategically default on their credit obligations in the face of declining asset values. Homeowners today face tough decisions that draw on morality which breeds a sense of obligation.  All while making a decision that could have deep consequences for their financial future.

What say you?  Should homeowners walk away and level the playing field?  Should residential real estate be seen simply as the place you live in and not as a financial asset?  Or should we fear the consequences of the De-Occupy Your Home movement and stay put?  Let’s discuss!

Most people see buying a home as a part of the “American Dream”, well for most it’s become a nightmare.  Buying a home is pretty much the best way to throw your money away and here’s why.  Renters win because they have the flexibility that homeowners do not and after 30 years alone of paying interest to the bank, you’ve lost out on any potential monetary benefit.

You never truly own the home.  Even after paying off the mortgage, there’s still property taxes, HOA fees, home insurance and other mandatory costs which make buying a home a veritable money pit. You must consider every single penny that you spend in direct or indirect relation to the home.  5 years ago, real estate investors would only consider the purchase price and subsequent sales price to determine the profit made.  Nowadays with reduced and nonexistent equity, investors are looking at every penny to determine whether or not the deal is worth it.

• Renters only rent.  No HOA fees, property taxes, home insurance, home repairs or any other cost usually handled by the landlord.   The counter argument here is that the landlord rolls all of these fees into the rent.  However, consider that while this may be true of some rentals, it is not of all rental.  In some cases, doing this drives up the rental rate which makes it unattractive to most renters.   Consequently, there are many landlords who eat the cost of extraneous fees as it is better to have someone in the unit than have it empty. 

There is no guarantee of a “permanent home” with home ownership.  As we’ve seen with the recession, should you lose your job and exhaust all reserve funds, you are out of luck and that home will be sold to the highest bidder.

• Renters can usually rent for as long as the landlord will allow or needs a renter in the home.  If a renter loses a home, there’s the option to get a cheaper rental until things get better.  When you own a home, even if your financial situation changes, you must continue to pay the mortgage payment as agreed upon during closing.

Buying a home locks you in for as long as you own the home.  Think you’ll just sell it?  Fat chance.  Given that most homeowners who bought their homes in the last 10 years are underwater, good luck.  Though it isn’t impossible, the only chance of getting out is to strategically default or sell via short sale if you’re underwater.  Both options trash your credit since the originally agreed upon balance isn’t what the bank receives in the end. 

• Renters on the other hand are free to go at the end of the lease which can be month to month upwards of 2 years.  There’s also the option to break the lease with a fee paid which equates to 2 months or that may be waived if the renter or landlord is able to find someone to replace the renter.

Today’s economic conditions require a 20% down payment.  In some areas, this can be as much or more than $100k for a starter home.  Once you sink the money into the home, you don’t see it again unless you’re lucky enough to sell at a profit.  This is a gamble and unfortunately, many homeowners come out on the losing end.

• Renters only need to put down the 1st month’s rent and security deposit. The latter is returned at the end of the lease term.

Home ownership is no longer an investment.  With the recession, this became a daunting reality for many homeowners.   Home equity became non-existent which meant kissing good bye the good ole “forced savings” theory.  For this reason alone, renters come out on top since the lack of an investment potential makes the argument that buying is more advantageous a moot point.

• Renters in this case, just pay rent with no expectation of long term investment potential.

Homeowners are responsible for the cost of all repairs and upgrades.  This is self explanatory.  As a homeowner you are responsible for every single repair that comes your way, renters only pay for repairs that are a result of intentional damage or negligence.  Otherwise, the landlord pays for everything.

• Renters don’t deal with repairs unless the resulting damage is their fault. 

What’s your perspective on renting vs buying?  This is an age old debate that’s certainly changed it’s course over the last 3 years.  Which side of the fence are you on?  Renting or buying?

Countless homeowners are underwater with no real understanding of their options for a loan modification or refinance.  In fact, many are facing foreclosure and unsure what their next move should be.  Do I  allow the property to foreclose or get a loan modification?  Do I qualify?  How do I qualify and what is the process?  Is bankruptcy the ultimate option?

The options and the questions related to it are enough to make you mail the keys in to the bank and walk away but we’ve got answers!

If you have any of these questions, this post is for you!

Home Affordable Modification Program (HAMP)

This program targets homeowners who are having a difficult time making mortgage payments for reasons that do not include unemployment.  The goal of this program is to lower your monthly mortgage payment to 31 percent of your monthly income so that your mortgage payments become more affordable.

Here’s How You Qualify

• You occupy the house as your primary residence.
• You obtained your mortgage on or before January 1, 2009.
• You have a mortgage payment that is more than 31 percent of your monthly gross (pre-tax) income.
• You owe up to $729,750 on your home.
• You have a financial hardship and are either delinquent or in danger of falling behind.
• You have sufficient, documented income to support the modified payment.
• You must not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.

 Home Affordable Refinance Program (HARP)

This program targets homeowners who are current on their mortgage but for whatever reason unable to get their home refinanced through conventional methods due to the decline in home value.  The goal is to put the homeowner into a new loan which much more affordable payments.

Here’s How You Qualify

• You have a mortgage owned or guaranteed by Fannie Mae or Freddie Mac.
• You do not have an FHA, VA or USDA loan.
• You are current on your mortgage payments and have not been more than 30 days late making a payment over the last year.
• Have a first mortgage not exceeding 125 percent of the current market value of your home.
• The refinance will improve the long-term affordability or stability of your mortgage.
• You have the ability to make the new payments.

Call your bank to determine if they are participating in this program and then take the next steps:

1. Use this Loan Lookup tools to find out whether your loan is owned or guaranteed by Fannie Mae or Freddie Mac
2. Call your bank to discuss your options.
3. If that doesn’t work then call at least 5-10 other banks to discuss your options and compare rates and terms.

Home Affordable Foreclosure Alternatives (HAFA) Program

This program targets homeowners who are interested in selling their home via short sale but the benefit from this program is that there is no balance owed on the property when all is said and done.  The end result is a short sale or died in lieu of foreclosure.  The latter happens when you give the deed back to your bank instead of foreclosing altogether.  Both you and the bank cut your losses and move on without penalty of owing a balance or being sued for for the balance down the line.  A nice bonus is that you will receive $3000 in relocation assistance

Here’s how you qualify:

• You live in the home or have lived there in the last 12 months.
• You have a documented financial hardship.
• You have not purchased a new house within the last 12 months.
• Your first mortgage is less than $729,750.
• You obtained your mortgage on or before January 1, 2009.
• You must not have been convicted within the last 10 years of felony larceny, theft, fraud or forgery, money laundering or tax evasion, in connection with a mortgage or real estate transaction.

Next Steps:

Based on the information above, call your mortgage servicer (where you mail your payments) and discuss your situation to determine how you can get started with one of these programs should they apply to you.

What To Expect

Given the volume of homeowners in need, expect some delay or even less than friendly customer service agents.  But, the key is to be persistent and get all of your paperwork together quickly while keeping it in a safe place.  Why?  The banks have been known to lose paperwork several times over leaving many homeowners frustrated often opting to abandon the process altogether.  Don’t give up!  The process is known to take many months but this is largely determined by your servicer and how diligently you follow up on getting the required paperwork in to them.

Manny Davis is a tax blogger and tax accountant, who provides assistance to taxpayers facing an IRS tax levy, tax lien, and other IRS tax problems. Feel free to visit his tax blog for additional tax tips.

Homeowners looking to lower both their winter heating bills and their 2010 tax bill may be able to take advantage of IRS energy-saving tax credits before the end of year. The American Recovery and Reinvestment act of 2009 expanded the home energy property credits and resident energy efficiency property credits. Moreover, many alternative energy/hybrid tax credits are still available. Tax credits are used to reduce the amount of taxes you owe or increase the amount of your tax return by the amount of the tax credit – it’s similar to applying a gift card or a coupon to a purchase.

Home Energy Property Credit

You can save 30% of money spent on qualified energy-saving improvements to your home, up to a maximum of $1,500 through December 31, 2010. If you spend $5,000 in 2010 on qualified energy-saving home improvements, you would be eligible for the full $1,500 credit on your tax liability, although it may vary depending on other credits you claim. In addition to the tax credit benefits, homeowners making these energy efficient improvements will also experience the long term benefits of reduced costs for heating and cooling their home. Examples of qualifying home improvements for this tax credit include:

• Energy-Efficient Windows, Skylights, and Doors with a U factor less than or equal to .30 and SHGC less than or equal to .30 or lower. Installation costs are not eligible for tax credit.
• Install Insulation – Rolls, rigid boards, pour-in-place, blow-in fibers and expanding spray bulk insulation products may qualify, as well as air seal products that come with a Manufacturers Certification Statement (weather stripping, caulk for sealing, house wrap, spray foam in a can). Installation costs are not included in the credit.
• Metal or Asphalt Reflective Roofing with energy start qualifications. Installation costs are not eligible for tax credit. Biomass stoves – with a thermal efficiency rating of 75% or higher will qualify for tax credit, as will the cost of installation.
• Central Air Conditioning, Ventilating, Heating – Installation costs for these units apply toward the tax credit, and include air circulating fans, central air conditioning, water boilers, air source heat pumps, natural gas, propane and oil furnaces. water heaters – energy factor greater or equal to .82 OR thermal efficiency rating of at least 90% qualify, whether the water heater is gas, oil or propane. Electric water heaters with energy factor greater than 2.0 qualify. Installation costs are eligible toward tax credit.

The tax credit generally applies to the cost of the materials and products only, and not to the installation expenses. You must already own the home and it must be your principal residence. Rental properties are not eligible. For more information, visit energy star.

Alternative Fuel and Hybrid Vehicles Tax Credit

A second energy efficient tax credit available to taxpayers who plan on purchasing a car is the alternative fuel/gas-electric hybrid tax credit. This tax credit is determined by the vehicle make and model and whether the manufacturer sold sixty-thousand vehicles. If you would like to know whether a vehicle you are considering is eligible for a tax credit, you can visit the IRS website or theUS Dept of Energy. Realize, this is for new vehicles only, bought or leased. Your dealer or the car manufacturer will be able to issue paperwork that certifies the dollar amount you may claim on your tax return.

How to Claim Residential Energy Tax Credits

You can claim these tax credits on your 2010 Federal income tax return. You do not need to itemize deductions to claim the credits. Simply use IRS Form 5696 for Residential Energy Credits to calculate the amount of your credit, and file it with your income tax return.

I’ve been quietly watching different outlets discuss the possibility that the 30 year mortgage might just be out of touch with 21st century reality:  People just don’t stay in their homes for 30 years anymore thus making this American dream a nightmare for many.

|Aside: This is a long post and I rarely write articles this long, but I promise, the information presented is worth it |

Arkadi Kuhlmann, CEO of ING wrote a well thought out piece in the Washington Post Op-Ed and I think lawmakers should take note:

More than nine out of 10 U.S. homeowners have long-term, fixed-rate loans. But the 30-year fixed-rate loan is dangerously outdated. It was created in the late 1940s, when the economy was fundamentally different. Just as fewer Americans remain with one company over their careers, fewer Americans remain in one home over their working lives.

And while a locked-in interest rate can provide peace of mind, consumers pay for that stability in front-loaded interest costs, slow buildup of equity and the many fees associated with refinancing or remortgaging. Last week, according to the Mortgage Bankers Association, refinances accounted for nearly 83 percent of mortgage applications.

If Congress is going to play a role in the housing market, it should create an incentive for consumers to pay down their principal home cost more quickly and accumulate equity. The tax deduction for mortgage interest payments encourages Americans to purchase homes, but the break comes on the wrong part of the loan — the interest, not the principal.

This tax credit could work well for consumers and banks. Shorter-term, fixed-rate loans generally carry lower risks for banks than 30-year loans do, resulting in lower interest rates. On a typical $225,000 mortgage, a buyer who gets a five-year, fixed-rate mortgage at 3.50 percent might well pay 4.75 percent for a 30-year loan. The savings would come to more than $11,000 when it’s time to refinance the five-year agreement.

The savings generated from shorter-term loans could be put directly toward paying down the principal by consumers eager to build equity. Instead of chipping away at their mortgage over half a lifetime, people would achieve the security that comes from homeownership much faster – and our nation would be encouraging savings, not debt. And anyone worried about a potential rise in interest rates could simply refinance at a different point or for a slightly longer period.

- Read more here

It’s time for change.  I think he brings solid ideas to the table that should be considered, but our political system makes it hard to bring about that needed change.  Looking to Canada’s system for inspiration once can see that it does indeed work while meeting the needs of homepotential homebuyers.

1. Full Recourse Mortgages in Canada. Almost all Canadian mortgages are “full recourse” loans, meaning that the borrower remains fully responsible for the mortgage even in the case of foreclosure. If a bank in Canada forecloses on a home with negative equity, it can file a deficiency judgment against the borrower, which allows it to attach the borrower’s other assets and even take legal action to garnish the borrower’s future wages. In the United States, we have a mix of recourse and non-recourse laws that vary by state, but even in recourse states, the use of deficiency judgments to attach assets and garnish wages is infrequent. The full recourse feature of Canadian mortgages results in more responsible borrowing, fewer delinquencies, and significantly fewer foreclosures than in the United States.

The full recourse feature of Canadian mortgages results in more responsible borrowing, fewer delinquencies, and significantly fewer foreclosures than in the United States.

2. Shorter-Term Fixed Rates in Canada. Canadian mortgages carry a fixed interest rate for a maximum of five years, and rates are then re-negotiated for the next five years, similar to a five-year adjustable rate. This practice allows banks to achieve a better maturity match between their assets (mortgages and loans) and interest income, and their liabilities (deposits) and interest expense, which protects them from the kind of maturity mismatch and interest rate risk that resulted in our S&L crisis and almost 3,000 bank failures in the 1980s and 1990s.

3. Mortgage Insurance Is More Common in Canada than in the United States. About half of Canadian mortgages carry mortgage insurance (compared to 30 percent in the U.S. currently and only 15 percent before the crisis), primarily for those mortgages financing the purchase of a home with less than a 20 percent down payment, and the borrower is required to pay the full mortgage insurance premium upfront. Another difference from the U.S. is that when private insurance companies in Canada insure mortgages, they have the authority to approve or reject the property appraisal, and they have strong financial incentives to only approve realistic property appraisals. Mortgage insurance in Canada covers the full loan amount for the full life of the mortgage, and cannot be eliminated like in the United States when the property value exceeds the mortgage balance. The traditionally much higher frequency of mortgage insurance in Canada compared to the United States helps to stabilize Canada’s mortgage and housing markets, and is one of the many features that contribute to its ranking as the safest banking system in the world.

Compared to the United States, the Canadian banking system is much more concentrated, with the five largest Canadian banks (out of only 82 in the entire country, compared to more than 8,000 banks in the U.S.) holding more than 80 percent of total bank assets.

4. No Tax Deductibility of Mortgage Interest in Canada. Home mortgage interest has never been tax-deductible in Canada, so there is no tax advantage to home ownership in Canada over renting. (Addendum: Except that any capital gains from the sale of a principal residence in Canada are not taxed). There is also no tax benefit to converting home equity into household debt in Canada, which has resulted in a much greater equity accumulation in Canada (70 percent of total real estate value) than in the United States (currently only about 45 percent). Also, paying down your mortgage in Canada is a tax-free investment and further encourages greater equity accumulation than in the United States. Interestingly, even without any tax advantage for home ownership, the Canadian homeownership rate (69 percent) is actually higher than in the United States (67.2 percent).

5. Higher Prepayment Penalties in Canada. Prepaying mortgages in Canada is allowed, but there are much stiffer prepayment penalties (three months of mortgage interest) than in the United States, which discourages the kind of refinancing that frequently took place in the United States leading up to the housing meltdown, and often involved pulling home equity out in the refinancing process (encouraged by the tax deductibility of mortgage interest).

Home mortgage interest has never been tax-deductible in Canada.

6. Public Policy Differences for Low-Income Housing. To promote affordable housing for low-income households, the Canadian government has not used public policies like the Community Reinvestment Act in the United States, which encouraged homeownership for lower-income and less creditworthy borrowers, financed frequently with subprime mortgages. Instead, the Canadian government provides public funding for low-income rental housing, rather than encouraging homeownership for low-income households, and Canada has thus avoided the American mistake of using misguided policies to turn good, low-income renters into bad homeowners.

7. Differences in Canada’s Bank Concentration and Greater Diversification. Compared to the United States, the Canadian banking system is much more concentrated, with the five largest Canadian banks (out of only 82 in the entire country, compared to more than 8,000 banks in the United States) holding more than 80 percent of total bank assets. This concentration became an advantage during the recent financial crisis because it facilitated critical discussions among the five large banks and the single federal regulator (the Office of the Superintendent of Financial Institutions). Also, Canada has never had branching restrictions like the U.S. laws that prevented interstate banking up until 1994, and this has historically allowed Canadian banks to achieve geographical diversification for their deposits and loans portfolios. It was largely this difference in geographical diversification that help explains why the United States had 9,000 bank failures during the Great Depression (each operating within only one of the 48 states, due to the prohibition on interstate branching) and not a single Canadian bank (all with branches nationwide) failed in the 1930s.

Interestingly, even without any tax advantage for home ownership, the Canadian homeownership rate (69 percent) is actually higher than in the U.S. (67.2 percent).

8. A Few Other Differences that Contribute to Bank Safety in Canada. There is a much lower rate of loan originations by mortgage brokers in Canada (only 35 percent) than in the U.S. (70 percent), far less mortgage securitization in Canada than here, and a much smaller subprime mortgage market. Banks in Canada keep and service 68 percent of the mortgages on their own balance sheets that they originate and underwrite, which encourages prudent lending since banks are putting much of their own capital at risk. Finally, almost all mortgage payments in Canada are made electronically by an automatic payment arrangement, which minimizes late payments.

Bottom Line: Taken together, the features and regulations of banks in Canada outlined above create a healthy and sound “pro-lender” environment absent of political motivations for outcomes like greater homeownership, compared to the often politically motivated “pro-borrower” and “pro-homeowner” policies of the United States. While Canada’s banking system has promoted responsible borrowing and prudent lending and underwriting practices with little politically motivated interference, the U.S. banking system seems to have encouraged excessive lending to risky borrowers because of the political obsession with homeownership.

Keep in mind that while I agree with most of the above-mentioned, I don’t agree with all of it.  There should be no pre-payment penalty if you want to move or have to for work, divorce or other reasons.  People shouldn’t be tied down to a mortgage resulting in a penalty if they want to leave.

My plan?

Introducing the morlease.

Since no one really buys homes with the intent to stay in it for 30 years ….

How often do people move?

About 40 million people move annually in the US. Nearly 3/4 of the US population moves an average of once every 5 years. Many things contribute to these statistics:

- shifts in the economy; for instance, from the Rust Belt to Silicon Valley.

- the doubling of the divorce rate in last 30 years; divorce results in many moves, and sometimes moves can trigger divorces!

- corporate transfers play a role

– changes in status (i.e., marriage, graduation from college, retirement, etc.) are common reasons for moving.

Why not create a hybrid mortgage-lease with some benefits remaining (equity, tax benefits etc, the longer you stay the more you get) and at the end of the term then you renew OR leave.

I haven’t done the numbers on how that would work when you’re selling to someone else or if the bank is stuck with it until it is sold but it’s an idea worth discussing since the way things are right now isn’t working.

People are moving for new jobs, to be closer to family, military transfers, divorce etc and can’t because their credit will plummet if they aren’t able to manage two payments or rent it out with enough cash flow cover the mortgage.

So requiring someone to stick out a 30 year mortgage nowadays just doesn’t make sense anymore.  The goal wouldn’t be to pay off the home in 5 years but to stay in it for at least 5-7-10 years and then have the option of leaving.  If you plan to stay in it for over 10 years then you can get the standard 15-20-30 year mortgage or go with the above mentioned plan by Arkadi Kuhlmann.

This way there would be at least 3 options for those wanting to buy a home.  And yes, that means I am throwing in my thoughts on mortgage changes into the ring.

What are your thoughts on this blossoming debate?  Is the 30 year mortgage outdated?  Why?  Why Not?

That’s right!  Operation move back to NOVA is in full effect!  Yesterday day the man and I decided that it would be best if we moved back to Northern VA.  I miss it terribly and so now starts the process of getting our home rent ready by June.

You may be asking why are we moving so soon after buying our first home back in 2007.  No, we aren’t walking away from our mortgage and we aren’t moving to find cheaper housing, though it would be nice.  We are just truly over the way that our current county government runs  right now.  Truly.  As young homeowners looking to buy a home 2-3 years ago we were mainly concerned with the neighborhood and finding a suitable home for our needs but less concerned about the county government and school system.

Well, as we near the point where we’re starting to plan a family within the next year or so these things start to matter more.  Especially the abysmal state of the school system and planned increase of property taxes when there will be a decrease in county services as proposed by our county executive who has gone to court to push it through.  According to our money grubbing county executive:

…..would have to lay off hundreds of workers, including police officers, if his proposal is not approved by the legislature.

“We would have to devastate our government. “We just don’t have the money to operate our government.”

…said the county has made enormous strides in the past few years, including seeing crime reduced and improved school test scores. He said if the county is unable to close the hole in its budget, public safety and education would suffer: “I want everybody to be clear on this: If we don’t raise taxes, we will be cutting police services, we’re going to be cutting fire/EMS.”

At the last community meeting to address the proposed tax increase, residents pushed back:

TH said she is tired of paying high county taxes and receiving what she said are inadequate public services. She complained about trash collection and said she goes to a hospital in Calvert County because it provides better service.

“I am embarrassed to say I live [here],” she said. “But you know what? I’m out. I’m going to Calvert County, where I can see how my money is spent.”

Many residents complained about what they see as excessive spending in the county government, citing county employees’ personal expense accounts, elected officials’ government-provided vehicles, the county school board’s decision to move its offices from Upper Marlboro to a new office building closer to the Beltway and [the executive's] recent trip to Africa in an effort to promote international trade at a cost of about $30,000.

[He] defended the school board move, explaining that the $36 million planned for the lease of the new building would be spread out over 10 years. Move-in costs would require an additional $8 million.

My question for them, with the school system being among one of the worst, how much worse can it get?  They were right about cutting public safety because I called 911 recently to report that someone went over the guard rails on the ramp going into DC, ladies and gentlemen they put me on hold.  HOLD.  4 MINUTES.  911 put me on hold before answering the call.  I was done.  Hung up.  That simple.

Now, don’t get me wrong, our neighborhood is great, I love our neighbors and the community is beautiful, but separate from the county government issues I’d prefer a community that is more tight knit, active and closer to shopping and other active lifestyle options.  I detest having to go to another county for Whole Foods, Harris Teeter or Moms Organic Market.  These are things we didn’t think about when we were buying the house but I guess it’s just a part of life and knowing what you want the next time around.  We’re also renting because we’re not at all interested in buying at this time because the idea of being tied to another home isn’t all that appealing.  Besides, the neighborhood where we’d like to move still has SFHs in the million dollar range.  Meh. We’ll pass.

But there are a few things we need to do first.

Property Taxes

We would like to start paying our property taxes on the home upfront instead of with our mortgage.  So we have to call the bank to figure out how this is done.  I know that our neighbour pays hers upfront as well and her reasoning is that she would rather get the interest on her money rather than give it to the bank upfront.  This will also enable us to me a bit more flexible with the rent because we wouldnt have to worry about the rent covering the property taxes.  The tax deduction is good enough to warrant doing this.  Even though the rent might not cover the mortgage (interest and principal), the tax deducation at the end of the year makes up for it.

Save $5000 Towards Emergency Fund For House

We plan to rent a similar home when we move back to VA and want potential landlords to know that we have an emergency fund should our home back in MD be vacant for a few months.  $5k should cover 3-4 months.  This will further indicate that we are serious about keeping above water financially just in case our home is vacant for a few months.

Pay Off Credit Cards

When potential landlords check our credit we want them to see ZERO balances on the credit cards.  That will happen by the end of March with miscellaneous accounts on track to be paid off by June/July.   This in turn frees up cash and decreases debt load substantially.

We know that there’s a possibility depending on how much we rent the place for that we might lose money, maybe $200? But staying here amidst a deepening recession dealing with the incompetent nincompoops who are the county government administrators along with an overall decreased quality of life here isn’t something I can further tolerate.  So instead of pissing and moaning about it, we decided to draw up a plan to make it happen.  You get one life and I live it knowing that if you ask, ye shall receive.

Have any of you done this?  Bought a home and then decided to rent it out instead and move elsewhere?  Any ideas and advice?  Thank ya much!

We all know conventional financial wisdom tells us we should put 20% down on a home, but I’ve always found it difficult to grasp hold of that theory especially now.

I moved to DC in 20003 when the real estate boom was in full swing. Houses were being bought and sold within a matter of days and weeks and realizing a of 25-40% ROI. It was amazing because I often wondered who are these people that bid over the asking price and paid 20% down? Let’s use Cameron Station as an example.

Cameron Station.

Cameron Station located in Alexandria, VA, noted as “the handsomest town” has to be one of my favorite places to live. Its a new planned community boasting a members clubhouse with a fitness club, swimming pool, guest services and main street retailers include flower shop, coffee shop and a deli/market. Its picturesque surroundings make it a delight especially with the fountain in the midst of the lake along the dog run. *swoon*

Of course I’d just wanted to rent there with no intentions of buying into the community because I didn’t see the logic in putting down $160,000 on a $800,000 town home, and I should add with no backyard. I’ve questioned that line of thinking since getting interested in real estate back then. Why? Because the bubble had to pop some day. Its the type of logic that most didn’t think twice about especially when 2005 rolled around and the market started to stagnate and buyers weren’t purchasing houses at 2004 highs. Still people kept funneling their life savings into these houses and where are they now? Most can’t even refinance because market conditions wiped out the equity and all they have is whatever a buyer chooses to pay for the home right now, putting the seller in a difficult situation.

From the Washington Post:

Lynn Edmonds and his wife, Sebnem, could barely wait to sign on the dotted line back in May when they committed themselves to pay $796,000 for a three-floor townhouse under construction in Alexandria’s Cameron Station.

But since May, the sales prices for the development have fallen — and units like the one the Edmonds bought are now being sold for $699,900. The Edmonds are facing the prospect of a $100,000 loss in value before they even walk through the front door.

Sad, but true. I wonder where that family is now and I’m actually quite curious as to their financial situation after buying that house. I am nosy in that way LOL!

So who does putting 20% down benefit? Where did it all start?

A Little History

From Dan Green @ The Mortgage Reports:

In 1956, when a bank stopped receiving interest payments on a mortgage, it took two important steps:

1. It took the home under possession via foreclosure
2. It did everything in its power to sell the home quickly

Remember, banks don’t like to hold real estate because they are not in the Real Estate business. Banks are in the “Making Money on Deposits” business.

To sell the home quickly, banks often sold homes at a discount to their “true” value. Not coincidentally, that have-to-sell-the-home-quickly discount hovered at 20 percent.

Steep, 20% discounts proved a terrific way for banks to rid their balance sheets of non-performing assets (i.e. homes owned by the bank on which no mortgage interest was being paid).

This is why The 20% Downpayment Myth ever existed at all.

Only, it wasn’t a myth up until 1956, it was the rule. A bank simply wouldn’t lend to a homeowner unless there was an up-front, 20 percent deposit on the home’s value. The 20 percent downpayment was really the bank’s insurance policy in case the homeowner defaulted.

In this sense, the bank was protected in the event of default whereas the homeowner stood to lose not only the house, but also the 20 percent.

This affair was truly one-sided in favor of the bank.

Over time, though, banks recognized that not all homeowners could afford 20 percent downpayments. Especially as home values began to increase. Banks also recognized how profitable mortgage lending could be.

PMI was born.

The PMI industry does exactly what its name implies — it provides insurance policies to issuers of mortgage credit. Using PMI, a bank could accept a less-than-20% downpayment, while buying an offsetting insurance policy in the event of default.

PMI benefited the banks in two way:

1. More money could be lent, increasing profits
2. The homeowner (and not the bank) paid for the bank’s insurance policy

Using PMI, a homeowner could make a 15 percent downpayment and buy an insurance policy for the remaining 5 percent down. This way, if the homeowner defaults, the bank can still drop the price 20% and walk away relatively unharmed — 15% comes from the (former) homeowner, 5% from the insurance.

Read more here, Dan really breaks it down giving us a good background on the myth of the 20% down payment.

Equity

In 2003, equity was a good thing! There were talks of buying homes with equity which made the deal sweeter. Buyers would then use the equity to leverage purchases of even more investment property which garnered them more equity with each purchase. And, rightfully so, prices during 2003 skyrocketed to astronomical levels here in DC.

Now? Not so much. Many homes are upside down with homeowners owing more than they paid for it, so the market is in the process of correcting itself if not on its way down to a recession. As such many people are beginning to realize that equity is only truly valuable when realized as cold hard cash.

Buyer Psychology Determines Realization of Equity

I don’t believe in “equity”, not until its realized money in my hand after a sale. Its “ghost money” and banks trick you into getting into more debt based on the equity on your house. Equity is the cash value of your home above what you paid for it. And another myth attached to the 20% down payment myth is that when you do put 20% down you automatically walk in with 20% equity that you may be able to borrow against in an emergency. Well, consider the family from Cameron station, if they had put 20% down, how much would that matter now? Their property value dropped significantly lower than what equity a 20% down payment would have afforded them.

So until I sell my home, the equity that resides here doesn’t exist. Why? Money talks BS walks, cash is king.

Recent Subprime Mess Means Less Equity for Most

Need I say more? Have you checked your house value in the last 6 months to a year? With short sales abounding and foreclosures rampant, these affect the prices of homes in the neighborhood. So be careful to think that if you’re paying 20% down that you will somehow have a built in nest egg due to your equity. If your home doesn’t appraise to the needed value then you are stuck until you sell your home. And, that is if you sell at a price needed to get back the 20% you put down.

My personal opinion? I think its foolish to put 20% down on a home. I would rather take my chances with the stock market. I know, feel free to set me straight in the comments

20% could be invested wisely in the stock market instead of sitting in your house

I have been screaming this from the rooftops since my mom bought her first house in 1999. No way would I lock up 20% in a house hoping that I will somehow benefit from it when this was all structured to benefit the bank in the first place. Think about it, if you wanted that 20%, you’ll have to PAY to get it if you aren’t selling your house. How is that a profit?

Also consider that buying a home may not be such a wise investment decision, check out these articles:

• The Cost of Buying a Home Over 30 Years
• 3 Reasons Not to Buy a Home
• Sometimes renting is just fine
• Why we rent
• Skip the 20% Down Payment

So do your research behind what may seem to be conventional financial wisdom. Your money should be working for you 100%. Not the bank. Paying 20% pays for the bank’s risk they take on by loaning you the money.

I’m interested to hear your thoughts on this as I know that it is a rather controversial topic. Many are invested in the myth that they need to put 20% down to buy a home, but my reply to that is….is buying a home profitable in the long run when you calculate all expenses involved (not just the purchase and sale price!)?

Do you still think that 20% is needed to buy a home?

How do you think 20% benefits the homeowner?