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Baby Boomers – Time to Walk Away From Your Mortgage?

Many baby boomers have seen their home equity evaporate within months. What was supposed to be a nice cushion for retirement just disappeared. Worse still, many baby boomers now find themselves in a situation where they owe more on their property than it is worth. They can’t sell their house – there are no buyers, no refinancing, and the lender won’t accept a short sale. Under these circumstances, does it make sense to mail your house keys to the lender and walk away?

In some cases, the answer is “Yes”. But the situation should be carefully considered before taking this step.

First of all, why would anyone take such drastic measures? Well, if you’re a baby boomer living on a fixed income and struggling to meet monthly mortgage payments, maybe your money can go further if you free yourself from that burden. What if you could rent or rent a house with less outlay – does that make sense then?

And there are baby boomers who want to retire but can’t so long as they have a big mortgage to pay. Maybe their kids have moved out and they’re empty nests in a big house. At some point, you have to ask yourself, “Why do I continue to live under the financial burden of this mortgage for a house that is of no benefit to me at this point in my life?” If you are upside down on your mortgage(s), the decision becomes clear after a few moments of consideration.

Those who have already retired or are approaching retirement need to take a step back and take a hard look at their financial situation. When you add up all your monthly bills, does your current – or projected – income cover them and leave you with money to have fun? If not, where can you cut expenses? Very often housing is the only area where cuts can be made to earn extra dollars.

That said, it is not beneficial to leave your home if any of the following conditions apply:

  • You still have equity in the property.
  • You are under 55 and have some “economic recovery” time on your side.
  • The terms of your mortgage and/or state law allow the lender to seek other assets to settle a debt.
  • A short sale is possible.
  • The benefits of continuing to receive tax deductions outweigh other considerations for your situation.
  • Your home can be rented at least at break-even, taking into account all expenses (including taxes and insurance).
  • You’ll probably need a good credit score for the next five years.

Even if none of the above apply, you still need to do the math to make sure “leaving” is the right choice for you. After all, you don’t want to leave anything on the table.

For example, suppose your house had a market value of $450,000 in 2006 before the big drop began. But now similar homes on your block are selling for $200,000. You basically lost $250,000 in equity.

And suppose you are also upside down on your mortgage. That is, your trust deed balances total $270,000. So the current market value of your home is $70,000 less than the amount you owe on it. Will your home one day regain all or part of its lost value? How long will it take to break even on the mortgage(s)? Is it worth holding on in the hope of regaining equity? Let’s see:

  • Assume the housing market bottoms out by the end of 2009 and home values ​​begin to gradually increase again by the end of 2010, say at an annual rate of 5%. Well, that means that at its current market value, your home will appreciate at the rate of about $10,000 per year (not including compound interest). Thus, it would take about seven years (because there is no appreciation in 2009-2010) of mortgage, tax and insurance payments to return to an equilibrium situation where you owe as much on your property as she is worth it.
  • At five percent annual appreciation, it will take about 23 to 25 years to recoup your $250,000 capital loss. If you hang on for three years beyond break-even (7 years), you’ll earn about $15,000 in appreciation. However, this is not even enough to cover closing costs if you sold the property after ten years.

So, are you willing to pay the mortgage, taxes and insurance (plus maintenance) for another ten years or so just to be able to sell the property without damaging your credit? How much are ten years of your life worth to you?

Here is the key to making your decision. If you’re sure you can put a comfortable roof over your head for less than what you’re currently paying to own, it may make good economic sense to walk away. Let’s say your current cost of ownership is $1,500 per month for mortgage payments and $400 per month for taxes, insurance, and association dues. That’s $1,900 in personal expenses each month!

Now, if you can rent an equivalent or scaled-down house (or one in a different location of your choice) for $1,000 per month, that would mean about $900 more each month in disposable income! You would still have insurance costs under a home insurance policy, but it probably wouldn’t be more than $400 per year. Think how much more comfortable your life could be with that extra income in your pocket and less stress!

And at your age, don’t worry about tarnishing your credit report. You will always get credit card offers in the mail – they never stop, the rates only go up. But who needs it anyway! Living without debt is a wonderful feeling.

Keep in mind that having the financial freedom to do what you really want, instead of working and sweating to feed a mortgage that no longer makes sense, is a precious thing when you’re a baby boomer. If it’s necessary to change your lifestyle to achieve this, it’s a small price to pay as long as you can still live comfortably and do what you want for your remaining life.

A word of warning. If you decide to take action, book your new rental and make any major purchases (eg, a new car) before your credit history runs out. Be smart about it. Remember that no one is watching over you except you.

So baby boomers, take stock of your own situation. You are approaching the last third of your life and the game has changed. Sit down and do the math for your own personal situation. Deciding to move away from home is not an easy task. It deserves careful thought and planning. But it might be the right choice for you.

Now, if you can rent an equivalent or scaled-down house (or one in a different location of your choice) for $1,000 per month, that would mean about $900 more each month in disposable income! You would still have insurance costs under a home insurance policy, but it probably wouldn’t be more than $400 per year. Think how much more comfortable your life could be with that extra income in your pocket and less stress!

And at your age, don’t worry about tarnishing your credit report. You will always get credit card offers in the mail – they never stop, the rates only go up. But who needs it anyway! Living without debt is a wonderful feeling.

Keep in mind that having the financial freedom to do what you really want, instead of working and sweating to feed a mortgage that no longer makes sense, is a precious thing when you’re a baby boomer. If it’s necessary to change your lifestyle to achieve this, it’s a small price to pay as long as you can still live comfortably and do what you want for your remaining life.

A word of warning. If you decide to take action, book your new rental and make any major purchases (eg, a new car) before your credit history runs out. Be smart about it. Remember that no one is watching over you except you.

So baby boomers, take stock of your own situation. You are approaching the last third of your life and the game has changed. Sit down and do the math for your own personal situation. Deciding to move away from home is not an easy task. It deserves careful thought and planning. But it might be the right choice for you.

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