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Managing your Money

Walking away is tempting, but think twice

By Michelle Singletary
Washington Post / February 11, 2010

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I’m getting more questions from homeowners who can afford their monthly mortgage payments, have no reasons to move, and yet wonder if they should walk away from their homes, because the values have dropped.

One Florida reader wrote that her house cost $550,000 when she bought it new in 2006. She put down 20 percent. She has a 30-year fixed mortgage of 6.125 percent. Her house is now worth about $350,000.

“I am going broke using savings to pay this mortgage,’’ she wrote. “I want to walk and rent. Why shouldn’t I?’’ There may be gaps that she did not fill, but if she has to use her savings to pay the mortgage, she was in trouble long before the housing bubble burst.

I think her frustration is what I’m hearing from a lot of other people: They feel as if they were duped because the values of their homes have dramatically decreased. Since others have walked away, the Florida homeowner feels it’s reasonable to negate her promise to pay.

This walkaway strategy is relevant only if you can’t pay the mortgage.

The current value on your home matters only if you need to move and can’t sell the home for enough to pay off the mortgage. In both cases, you have a serious problem.

Before the recession and the equivalent of a housing market earthquake, many borrowers bought into the notion that houses would always increase in value. We know now that was - and is - not a rule of thumb you can live by.

There are plenty of reasons to stay put. Walking away would devastate your credit rating, making it more expensive to buy again. It would probably cost you more to rent, too, because a landlord may demand a larger security deposit and perhaps even higher rent to ensure you won’t abandon your lease.

Walking when you are in the financial position to pay is not right or wise. You don’t get a free pass if you can afford your mortgage but you want to split simply because the value is down.

Here’s another question, about moving from two incomes to one.

“I am quitting my $100,000-a-year job to stay at home with my 2-year-old and twins, who will be born this spring,’’ the reader wrote. “We have no debt besides our mortgage (about $2,000 a month). My husband also makes $100,000 a year. However, I am frightened about what this will do to us. We don’t spend frivolously, but we don’t pinch pennies, either. We have about $50,000 in savings, but plan to use some of that to buy a bigger car that will accommodate three [children’s] car seats. How can we plan now so we’re not struggling later?’’

I have one word that will help anybody at any income level: Budget. This couple should start living on that one income. They should, if they haven’t already, look for every single place they can cut: cable, cellphone plans, eating out, insurance, and so on. Additionally, when they remove expenses for child care, commuting, and the other expenses that go along with working full time, they may find they won’t have to reduce their standard of living by that much.

This couple has put themselves in a good position by buying a home with a monthly mortgage they can afford on one income. That will help them now that the wife will stay home.

And I agree about paying cash for the car. I’d look for a late-model reliable used car. Yes, paying cash will deplete their emergency money. But with one income, they shouldn’t add any debt if they can help it.

The housing meltdown reaffirmed what many people should have known: Your home is not just an investment. It’s first a place to live. So buy what you can afford for the long term.

Michelle Singletary writes The Color of Money for The Washington Post.