Baby Boomers – Time to Walk Away from your Mortgage?

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

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

First, why would someone take such drastic action? Well, if you are a baby boomer living on a fixed income who has been straining to keep up with monthly mortgage payments, perhaps your dollars can go further if you get out from under that burden. What if you could rent or lease a home with less out of pocket expense – does it make sense then?

And there are baby boomers who want to retire, but cannot do so as long as they must feed a big mortgage. Perhaps their children have moved away and they are empty nesters in a large home. At some point, you have to ask yourself, “Why am I continuing to live under the financial burden of this mortgage for a home that has no benefit to me at this point in my life?” If you are upside down on your mortgage(s), the decision becomes clear after just a few moments of reflection.

Those who have already retired, or are coming up on retirement, need to step back and take a hard look at their financial situation. When you add up all your monthly bills, does your current – or anticipated - income cover them and leave some bucks for fun? If not, where can you cut expenses? Quite often, housing is the only area where cutbacks can be made to gain additional dollars.

That said, it does not pay to walk away your home if any of the following conditions apply:

•  You still have equity in the property.

•  You are under the age of 55 and have “economic recovery” time on your side.

•  The terms of your mortgage and/or state law allow the lender to pursue other assets to settle a debt.

•  A short sale is possible.

•  The benefits of continuing to receive tax deductions outweigh other considerations for your circumstances.

•  Your home can be rented out on at least a break-even basis, taking into account all expenses (including taxes and insurance).

•  You are likely to need a good credit score sometime within the next five years.
 

Even if none of the above applies, you still need to do the math to ensure “walking away” is the right choice for you. After all, you don’t want to leave anything on the table.

For example, suppose your home had a market value of $450,000 in 2006 before the big slide began. But now, similar homes on your block are selling out of foreclosure at $200,000. You have essentially lost $250,000 in equity.

And suppose you are also upside down on your mortgage. That is, the balances on your trust deeds total $270,000. Thus, the current market value of your home is $70,000 less than the amount you owe on it. Will your home one day recover all or some of its lost value? How long will it take to get to a break-even point on the mortgage(s)? Is it worthwhile to stick it out in hopes of regaining some equity? Let’s see:

•  Assume the real estate 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 five percent. Well, that means at its current market value, your home will appreciate at the rate of about $10,000 annually (ignoring compounding interest). Thus it would take roughly seven years (because there is no appreciation during 2009-2010) of mortgage, tax and insurance payments to just get back to a break-even situation where you owe as much on your property as it is worth.

•  At a five-percent annual appreciation, it will take roughly 23 to 25 years to recover your loss equity of $250,000. If you hang on for three years beyond the break-even point (7 years), then you would gain about $15,000 in appreciation. However, this is not enough to even cover closing costs if you sold the property at the end of ten years.
 

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

Here is the key to making your decision. If you are sure you can put a comfortable roof over your head for less than you are now paying for home ownership, then it may make economic sense to walk away. Let’s say your current cost of ownership is $1,500 monthly for mortgage payments and $400 monthly for taxes, insurance and any association dues. That’s $1,900 in out-of-pocket expenses every month!

Now if you can lease an equivalent or downsized home (or one in a different location of your choice) for $1,000 per month, that would mean about $900 more each month in spendable income! You would still have some insurance cost under a household policy, but this probably would not exceed $400 annually. Think how much more comfortable your life could be with that additional income in your pocket and less stress!

And at your age, don’t worry about blemishing your credit record. You’ll still get credit card offers in the mail – they never stop, the rates just get higher. But who needs them anyhow! Living debt free is a wonderful feeling.

Bear in mind that having the financial freedom to do what you really want to, versus working and sweating to feed a mortgage that no longer makes sense, is a precious thing when you are a baby boomer. If changing your lifestyle is necessary to achieve that, it is a small price to pay as long as you can still live comfortably and do what you want during your remaining lifetime.

A word of caution. If you do decide to take action, then line up your new rental and make any large purchases (e.g., a new car) before your credit history is dinged. Be smart about it. Remember, no one is looking out for you, but 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 own personal circumstances. Deciding whether to walk away from your home is no small thing. It deserves careful consideration and planning. But it just may be the right choice for you.