Would you walk, or stick it out?

[cryptyk]

Looking for opinions on what you would do. My wife just got pregnant and stopped working. I'm seriously considering walking and renting for 7 years.

Me:
$115k salary + $22k annual bonus = $3,619 net every two weeks
Mortgage + HELOC + HOA: 3224 + 200 + 125 = $3,550
Other monthly expenses (cars, insurance, utils, medical): $3,150
Food/Gas/Entertainment: $1,200
Total monthly bills: $7,900

Note that I'm sliding into debt at a rate of about $700 per month (assuming no unforseen bills) since my wife stopped working.

The house:
San Diego County, California
Purchased for $423k. Principle currently $403k @ 6.875% 30yr. fixed
HELOC for $25k @ 3.75 variable
Assessed for taxes by the county at $300k
Zillow estimate: $274k, which I would be unlikely to get. Maybe $250k, based on recent sales in my area.


I haven't missed a house payment yet. I got a loan mod without missing a payment last year, just before my rate was going to adjust. I'm now in a 30yr fixed @ 6.875%

The way I'm thinking about this is that I can live for free in the house for around 6 months, then rent a house MUCH nicer than mine for about half the price. By the time my credit cleans up, I would have saved around $165k. The big question is, "Will my house have $165k in equity 7 years from now?"

So what do you think? Walk, or stick it out?

[cryptyk]

One additional detail I forgot to add: This puts the house underwater by around $178k, or 42% of the purchase price.

[The Professor]

Were both loans created in conjunction with your purchasing the home? I need an answer to this question to serve as a basis for discussing recourse vs. non-recourse debt under California Code of Civil Procedure Section 580b.

Daniel

[cryptyk]

No. The 25k HELOC is a cash line of credit that I used making improvements to the home.

[cryptyk]

Just got a call from my mortgage company wondering where this month's payment is. I told them I'm considering walking. They said that they might be able to reduce the monthly payment by reducing the interest rate to 6.7%, and extending the loan out to 40 years.
I told them I would consider it, but that it really doesn't address my concern about being so far upside down on the home.

They sure aren't very nice on the phone.

[civilguy]

So about 30% of ur gross income goes to housing payments. Isnt' that supposed to be the norm for how much a mortgage payment should be?

[LittleBlueTruck]

Don't take this the wrong way, but with the "Other monthly expenses (cars, insurance, utils, medical): $3,150" line in there... That should be your first place to cut. Cancel your cable/satellite. Drive more affordable cars, etc. If you're only negative-spending by $700 each month, I'm betting you could take it out of that category (if you really wanted to!).

Like I said, if you really wanted to. I like my toys and stuff too... but really it's the first stuff that should go.

[cdmosaic]

Well, I'd point out that you don't factor bonus, or at least should not, in total gross as it is not guaranteed income. I beleive finance guidelines used to be 31% of gross monthly income, but I think they was meant to include the complete expense, mortgage, taxes and insurance. Maybe someone more knowledgable can confirm that.

In any event 30% is often too high in my opinion. Freddie Mac is proposing modification down to 38% of gross - for me that would double my existing payment. I'm unable to pay that already so how is 38% afforable. Actually for whom is 38% afforable? People who have no other expenses - good lunk finding them.

[cdmosaic]

My lender suggested I lower my food bill of $700 for a family of 3. Whatever, I live in the SF Bay Area - it costs a lot to live here. Get real people. Besides none of that addresses the fact that the houses have lost 40% of their value.

If I can't get a decent modification I'm walking and will buy something less at the bottom of the market in a couple of years. Think about it - short term pain, longer term gain.

[cryptyk]

The $3,150 (ish) is comprised of:
Personal Loan from parents 541
HOA 125
City (water + trash) 125
AT&T 186
Cable (might cancel to save) 150
Electricity 170
Auto Loan 563
Auto Loan 524
Insurance 180
Medical (increasing with pregnancy)200
Credit Cards (just to stay even) 200
Maintenance, unexpected expenses 300

It fluctuates each month, but it's around $3k per month.

I absolutely agree there are places we can cut back. I can cancel the cable, etc and likely get down to where I could scrape by each month.
-or-
I could rent a house that's much, much, much nicer than mine and save about $1,500 each month, not to mention the initial savings of ~$25,000 by living in the house until eviction. Oh, and I get to walk away from the $178,000 that I'm underwater (paper loss, etc.)

It's not an easy call, but I'm trying to look at it objectively. Thank you for the opinions so far. I appreciate them.

[deb64]

Lets boil this down to the bare facts: You owe $428K on an "asset" worth an estimated $250K.

What would a CEO do?

good luck

[deb64]

RE my above post: Not to disregard the issue of recourse vs non-recourse, of course.

[LittleBlueTruck]

Yeah, funny how all that stuff adds up! I hear you though... I make the same simulation in my mind all the time. Do I live house poor, or actually enjoy my 30's and try again after paying off some huge bills.... Let us know how you make out!

Originally Posted by cryptyk

The $3,150 (ish) is comprised of:
Personal Loan from parents 541
HOA 125
City (water + trash) 125
AT&T 186
Cable (might cancel to save) 150
Electricity 170
Auto Loan 563
Auto Loan 524
Insurance 180
Medical (increasing with pregnancy)200
Credit Cards (just to stay even) 200
Maintenance, unexpected expenses 300

It fluctuates each month, but it's around $3k per month.

I absolutely agree there are places we can cut back. I can cancel the cable, etc and likely get down to where I could scrape by each month.
-or-
I could rent a house that's much, much, much nicer than mine and save about $1,500 each month, not to mention the initial savings of ~$25,000 by living in the house until eviction. Oh, and I get to walk away from the $178,000 that I'm underwater (paper loss, etc.)

It's not an easy call, but I'm trying to look at it objectively. Thank you for the opinions so far. I appreciate them.

[The Professor]

Were I in your shoes, I'd be looking at banking the money that would go towards house payments with an attempt with that money to shortly before the completion of the foreclosure by the first lender, to see if I could buy my way out of the second for say one-half of the unpaid principal balance.

Take care,

Daniel

[HopingtoFind]

cryptyk,

Just a suggestion... I was looking over your expenses, and they look reasonable... One thing you could do is combine Phone and Cable, they offer good pricing if you combine everything with one company, this way you wouldn't have to eliminate Cable.... We are paying $100 total for cable, phone and internet..

[Ambling]

Good point on the phone and cable bill. Also, look into Vonage for your phone service. If you already have high speed internet at home then Vonage costs about $25 a month for practically unlimited calling.

[cdmosaic]

If you really want to save on phone bill check out magicjack.com. We just swtiched. Phone bill = $40, Vonage = $25, Magicjack = $40 for 2 years! You read that right, $40 for 2 years of free loacal and long distance. Serivce is OK, not as good as the phone, but as I also have cell, I can make the scarfice for that kind of savings. $1000 in two years. Worht it to me.

[civilguy]

Negative equity sucks. My place is at -200k negative now, probably more and losing equity by the week. We found a place that is nicer and cost 2.5k a mont less than my current INTEREST ONLY and tax insurance payments. Here is a quote from Mr. Mortgage " Make no mistake about it - MOST BORROWERS ARE NOT WALKING BECAUSE THE CAN’T AFFORD THE PAYMENTS. They are walking because all of their after-tax income each month is going out in bills and the largest portion is going to a home worth half of what they owe. When they are spending such a large portion of their income on a massively depreciating asset, it makes good financial sense to dump that asset. When you can’t sell, that means walk away." I'm sure a lot of people fall into this category.