Fixed-rate mortgages are boring. Get something fun instead!

February 2, 2011

Welcome to Recycle Friday. This week, a post that originally ran on LenPenzo.com, updated for posterity.

If this page appears in your mortgage document, RUN. Also, mortgages shouldn't have sines and tangents in them

Should you walk away from your mortgage just because your home depreciated?

So you refinanced. Or bought too much house. You divided the mortgage payments by your income, and decided you could swing something a few percentage points higher than the recommended 25–33 because the market was rising and your house would make you rich just by existing.

You relied on speculation as an investment strategy (not even your own speculation, but other people’s.) But your house got cheaper, maybe cheaper than what you bought it for. That’s called “losing money on an investment,” which happens all the time, but people think it oughtn’t when your bedroom and kitchen are part of the investment.

The market might bounce back. If you’re 7 years in, lots can happen in the remaining 23 on a 30-year mortgage.

When you lose money on a stock, your brokerage account might get wiped out, but no one will see the evidence of this except you. Owe more than your vehicle is worth, and it might get repoed. Fine, tell people you sold it and always wanted to ride the bus instead. But stop making payments on a house, and there’s a letter from the constable on the door, maybe some yellow tape involved – hard to keep that quiet from the neighbors. Also, people getting forcibly removed from “their” houses (it’s yours and not the bank’s only after you pay the entire mortgage) make for striking photo and political opportunities. After all, bankers are evil. Meanwhile, it’s the working stiffs just trying to make ends meet who get raked over the coals. (Wow, a sentence composed entirely of clichés. Mike Lupica approves.)

Some people who make enough to cover the mortgage dump the house anyway – the strategic default. They assume investment values only move in one direction. According to Experian, that includes 20% of defaulters.

This is hiding behind the law. Stop making payments, and it’s not like you’ll be evicted that week. It takes months, even years. The idea here is to take the mortgage payments and put them toward, say, your credit card balance, figuring the lender will gladly renegotiate a contract you signed in order to get some sort of return on its investment.

Some borrowers think this is fine because if the lender kicks you out, it’ll be tough to sell the house to someone else in a down market anyway. The lender at least wants the house to stay lived in.

This is nonsense. Strategic defaults hurt everyone.

A strategic default does to your credit score what Michael Vick did to underperforming fighting dogs. You’ll never be able to borrow either a) again, or b) until Congress and the White House decide that so many people need to improve their credit scores that it just wouldn’t be fair to let some insidious little 3-digit numbers have such power over those people’s lives.

What’s the solution? Well, no politician of either party wants the other accusing him or her of standing by while old ladies and cripples are being kicked out of “their” houses. The government would then essentially renegotiate mortgage contracts, setting caps on future ones and insisting the lenders take less. Under this type of forced renegotiation, the borrowers don’t even have to sack up and face the lenders themselves.

Besides, co-workers, professors, and the blonde lady on TV say defaulting is fine. And for PR reasons, lenders are hunting down deficient borrowers about as aggressively as the feds go after illegal immigrants.

Say you walk away from your mortgage, mail your keys to your lender, then rent somewhere. Your now-former neighbor follows, then a third. No matter how swank a neighborhood you deserted, the lawns turn brown and the pools green because no one’s living in the houses. Which reduces the value of the remaining houses. Now the people who stayed behind and haven’t (yet) defaulted watch their homes’ values decline. Which means they’ll likely owe more than their houses are worth, making it more likely that those folks will default. Continue like this, and you end up with…Detroit.

When you declare bankruptcy, you can renegotiate to protect yourself from creditors. But strategically defaulting is the opposite – you keep all your assets except the house and mortgage.

So what to do? Four choices:

1. Man up, economize and make your payments. You’re obligated to the lender, yourself (to preserve your credit), any kids of yours (unless you don’t think you need to set an example) and society. If you steal from your lender, it doesn’t directly affect the rest of us, but it makes civilization incrementally more difficult to live in—the broken window theory.

You don’t like that answer? It’s a house, for crying out loud. You need somewhere to live. No matter how much value it loses, it’s still better than renting and never building a dime of equity. Stop assuming that because your $100,000 house lost 10% of its value last year, it’ll lose a similar amount next year and by 2022 will be worth -$10,000.

2. Short sale. If you know you can’t make your payments, and you’ve exhausted every possible way of earning or otherwise securing money, call the lender and come clean AS SOON AS POSSIBLE. The lender will sell the house at a loss, just to get you out of there and collect some money. You’ll still be on the hook until the bank resells the house, but that won’t last forever and at least you can stop throwing good money after bad.

3. Ask for a loan modification. It’s begging, but your pride already left a while ago.

4. The Deed in Lieu of Foreclosure. Tell the lender, “Look, I can’t make the payments. Let’s not short sell, I’ll just give you the damn thing to get out of this suffocating debt.” This hurts your credit rating the least, and tells the lender not to worry about you being one of those evictees who pours concrete in the toilets and makes off with the copper wire.

And next time, get a vanilla 30-year fixed-rate mortgage.

**This post is featured in the Totally Money Blog Carnival-Valentine Edition**

Filed Under: Bad Examples, Capitalism, Consumer Debt, Economics, Personal Finance, Real Estate Tagged With: , , , , , ,

GUEST POST: 6 Habits Of A Frugal Shopper

December 16, 2010

Every week, we get solicitations for guest posts. 99% of them are dreadful. Some are even belligerent. None of them are from someone who’s actually been to our site.

Until now. Mr Credit Card runs Ask Mr Credit Card, and has good opinions. By which we mean he largely agrees with us, which makes sense, because our opinions are rooted in truth.  We assume he’s a Brit, given that he doesn’t punctuate “Mr.” He also writes in the third person, like us…er, like the Control Your Cash authors. Anyhow, take it away, Mr Credit Card:

Today, Mr Credit Card is going to highlight some habits of a frugal shopper. Though he reviews and recommends the best credit cards, he also believes that unless you are frugal and pay all your bills on time and carry no debt, you have no business carrying a credit card. Here are some of his tips to pay less than “full retail” prices.

Everybody loves a good deal. But we shouldn’t buy stuff just because we can get a good deal or there’s a sale going on. Instead, we should only buy things we really need. But even then, you should always find ways to pay “below retail”.

1. Ignore the “original price” I can’t stand how most stores mark down prices. The big department stores are the worst here as they will always show an original price or a Manufacturer’s Suggested Retail Price that is much, much higher than the lowest price. Often I see 3 or even 4 prices, suggesting that it’s marked down several times. Who cares? Do you know what you can do with your “suggestions”? The only price that counts is the price you pay.

(Ed. Note: Any man who’s taken part in the following useless conversation, raise your hand: Q: “Honey, how much did that cost?”  A: “I got it on sale.”)

2. Always Compare Prices Just because an item is marked down, that doesn’t mean it’s even a good deal. I found what I thought was a good deal on Amazon the other day. No other retailer I searched for had this cordless phone system at a lower price after tax and shipping. Even eBay was a bust. The next day, I found the phone system in Costco for almost half of what Amazon was selling it for. Research all your major purchases. This was the exception, as I usually find lower prices at Amazon or eBay than most retail stores, but you never really know. EBay

(Ed. Note: How do you capitalize “eBay”, assuming you do, when it starts a sentence? Curse this stupid phenomenon of brand names that start with lowercase letters and have medial capitals.)

is especially good for low-price, highly-marked up items like computer and electronic cables and accessories. I can always find a cell phone recharger for $5 that costs $20 at the dealer.

3. Always Ignore Credit Card Rewards Credit cards rewards are great, but only if you pay off your balance in full every month. Even then, you can still be tempted to spend more. One of the funnier lines in a movie I once saw was when the ditzy teenager was questioned as to whether her parents mind her spending so much on her credit card. She replies, “So what, they’re getting frequent flier miles.” That statement perfectly encapsulates the entire premise of reward cards. The idea is to get you to spend more in order to earn your reward, which is usually worth 2% or less than your purchase. If you can’t understand why this is a bad idea, you should never, ever have a reward card.

(Ed. Note: Full disclosure, your regular blogger has an American Express HiltonHHonors card. Only because it had no annual fee and I stayed in Hilton hotels a few times a month anyway. The card gives me free hotel stays without giving me incentive to change my behavior: if I don’t have enough points for a free stay at the $89 Hilton Garden Inn while the Holiday Inn Express across the street is renting rooms for $79, you can probably figure out where I’ll stay.)

4. Pinch Twenties, Not Pennies I suppose if you have unlimited time on your hands, you can make a career out of clipping coupons. In fact, there seem to be people who do just that. For the rest of us with a job and/or a life, you have to prioritize where you save money. Go for the big scores. Spend your time and effort saving on big things.

5. Make Sure You Are Not Just “Saving Money” On Something You Really Don’t Need The whole idea behind coupons is not to let you spend less, but to make you spend more. When you see a coupon for some product, ask yourself if it was something that you were going to purchase anyway. If it was, great. If not, forget it. Ask yourself if there aren’t less expensive alternatives. Perhaps you can get the same item for less on eBay or Craig’s List?

6. Always Compare Total Prices We live in a world with little price transparency. Book a rental car if you want to see how your bill quickly becomes twice the price of the rental itself. Telecommunications companies are close behind with all of their tax recovery charges. Hey, I pay taxes too! Can I subtract a “tax recovery fee” from your bill? Even a straightforward online purchase might include tax and shipping.

Filed Under: Consumer Debt, Credit Cards, Economics, Net Worth, Shopping Tagged With: , , , , ,

Scrooge Had The Right Idea

November 25, 2010
Ebenezer Scrooge

Ebenezer, not McDuck

(NOTE: Read the bottom of the post. We’re submitting this in a GoBankingRates.com contest. Details here.)

You want to show your loved ones how much you care? Get them the perfectly accessible, never unfashionable, easy-to-find gift.

Nothing.

Last I checked, we were in the worst recession in several generations – one spawned by a chronic reluctance to save and spend judiciously, on the part of both us and the officials we elect to spend our money.

Do you have enough to take care of yourself, without worrying about going into debt? Are you carrying a zero balance on your credit card(s)? If the honest answers are anything other than two resoundingly loud yesses, then you shouldn’t be buying gifts anyway.

Wow, what a killjoy. Don’t you understand that giving is the very meaning of Christmas, regardless of how much money you have?

Look, Mr. and Mrs. American consumer: the meaning of Christmas is commemorating the birth of Christ, but that’s beside the point. When your kids rip the wrapping paper off a new 320 GB PlayStation 3, and the smiles on their acquisitive little faces light up the living room, try to remember that that warm feeling you’re experiencing is inexorably linked to the $350 that you just added to your four- or five-digit credit card balance – and is now going to be costing you prohibitive interest.

Discretionary spending is for the people who can afford it. Which, by any measure, doesn’t include that many of us this year. For the rest of us, the best you can give your family and friends is to take active steps away from privation and in the direction of affluence. Buying stuff you wouldn’t ordinarily buy, especially for other people, won’t get it done.

You can rationalize all you want. Here are some paint-by-numbers rationalizations to get you started:

-Sorry, I’m not a heartless monster.

(Good, your kids can fashion a lean-to out of the PS3 box after the mean old lender finally forecloses on the house you bought with an interest-only mortgage, and couldn’t make payments on because you were too busy financing toys.)

-Spending money helps the economy.

(They why not take out a second mortgage while you’re at it, and use it to pick up a couple of snowmobiles? The liquidity of money is something for rich people to worry about, not you.)

-Other people will buy me gifts, and I’m obligated to return the favor.

(Thus proving that you don’t really buy that bromide about “the spirit of giving”. If people are giving you things, great. Let the givers enjoy their giving – if they really do enjoy it for its own sake, they won’t want nor expect anything in return.)

Merry Christmas!

Today’s post is part of the Go Banking Rates “Holidays and Money” writing project. It’s supposed to encourage creative writing among personal finance bloggers, on a particular subject.

If you liked the post, VOTE for it here.

Filed Under: Bad Examples, Capitalism, Consumer Debt, Credit Cards, Net Worth Tagged With: , , ,
« Previous Page
Next Page »