Monthly Archives: June 2010

Should I Walk Away from My Mortgage?

Posted on by  at  5:00 am
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For some, the idea of walking away from a mortgage presents quite a moral dilemma. Others feel duty-bound to fulfill their contractual obligation to continue making payments to the lender, regardless of how much (or how little) their home is worth.

Personally, I believe if one has the ability to pay their debts, any debt, they should pay them. This idea doesn’t stop with mortgages. I don’t like voluntary car repossessions or walking away from credit card debt you legitimately owe and can afford to pay.

Think about it. When you signed your signature 27 times the day you took on a mortgage, you accepted some risk that the “investment” you were making would hold its value. The lender made the same calculated risk, and even required you to buy private mortgage insurance if your down payment was small to transfer some of that risk away from them.

Now, there is a difference in someone losing a job, struggling to make their mortgage payment and other obligations, and someone who simply wakes up one morning and decides they are no longer going to pay their bills. Those in the latter category rationalize their decision with sentiments like, “Well, why should I continue to pay for something that is of lesser value than when I bought it?”

Using that same logic, we’d walk away from new car loans, and even credit card debt, because the things we “financed” are not worth nearly the same value now as when purchased new. Besides the question of ethics, walking away from your mortgage, or any debt, can have serious financial consequences.

Damage to Your Credit

If you simply walk away from your mortgage, you credit will take a hit. If your credit is already shot, you may not care. If you are of the opinion, what’s a good credit score good for anyway, then you may not care.

If you recognize that maintaining a good credit score is a necessary evil in today’s society because insurers, employers and lenders check scores when making offers, you might consider damage to your credit score a negative consequence of walking away from a mortgage.

Apart from the hit to your FICO score, walking away from your mortgage could also present legal issues. Walking away from any debt means the lender is free to foreclose (or repossess) the item you financed and sell it at whatever value the market brings. For foreclosed properties, that usually means a big discount.

If the amount the property sells for isn’t enough to clear the debt owed against it, guess who the bank can legally come after? That’s right, you. So “walking away” doesn’t necessarily mean you are off the hook.

Alternatives to Walking Away from a Mortgage

Workout payments. If you are legitimately in trouble, for whatever reason, and are unable to make your mortgage payment, attempt to work with the lender. Most mortgage issuers are preparing for a higher rate of foreclosures in the near future, which could mean big losses for them. They’d much rather have customers continue to stay in the home and make payments.

Short sell. If you do decide to sell, discuss the option of a short sell with your lender. Basically a short sell means selling the property for less than is owed, at a mutually agreed to price amongst buyers, sellers and the current lender. Be sure to negotiate a sale without recourse – meaning the bank cannot come after you for the balance of the loan (as described above).

Do nothing. If your mortgage is underwater, meaning you owe more on your home than it is worth, but you are able to continue making payments, then the most attractive option may be to do nothing. Stay put. Hope that the economy comes around in the next few years and your value comes back. In time, by continuing to make payments, you will eventually reach a point where your house is no longer underwater.

The Housing Bubble Lessons Learned

I lived in rentals growing up because my mom could never afford a down payment on a home. Until just recently, my family leased a house until we were debt free. During that time as a renter, all I ever heard from others was that we were making such a mistake by not buying a home. A home was a fantastic investment. Renting was like throwing money away.

Well, I wonder how many of those same people still believe that. A home can be a good investment, but mostly it’s just shelter to keep you and yours warm and dry. That’s all it is. And it doesn’t matter if you pay a mortgage company or a landlord to keep that shelter.

Of course, you may have more freedoms owning real estate, but you have more responsibilities, too. There are pros and cons to virtually every financial decision we make, so do what works best for your situation. Whatever you do, avoid buying real estate until you are on a solid financial foundation and avoid viewing it as a significant investment. After all, we’ve seen how quickly that “investment” in real estate can drop.

8 Critical Steps Every Family Should Be Taking to Prepare for the Next Financial Crisis

Posted on by  at  5:00 am
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It remains to be seen whether or not the worst has passed, or if we are merely enjoying the relative calm during the eye of the latest financial storm. I personally believe we are in for more tough times in the near term.

A variety of stimulus programs have conspired to create an “artificial demand” that has produced seemingly positive results. However, I believe it only served to delay the inevitable. In fact, I’ll go a step further. I believe it made the inevitable even worse. Would the economy have been worse without the stimulus? Probably. Would we have survived and saved a couple trillion dollars in new debt? Probably. But who knows. I’m not an economist, and I certainly don’t play one on TV.

In the Frugal household we are hunkering down, financially. The 2008 recession caught us off guard. We were still in debt, had little savings, and were just beginning to deal with what would become a year-long medical and financial crisis with my mom, who suffered an aneurysm and subsequent stroke at 53 years young. She passed away in September of 2009. Fortunately, we were able to ride the storm out, but I made it a goal to be better prepared next time. And next time may be closer than any of us think.

What if I’m wrong? Well, I hope I am. You can say I told you so. But even if I am wrong about another economic downturn in the next year, at least your family will have improved its finances between now and then.

#1 Get Your Financial Documents in Order

The time to organize financial documents is before a crisis hits. Buy a file cabinet to store things like financial statements, and a fire-proof box to store more important documents, such as life insurance policy statements, deeds and titles, etc.

Action Item: Spend Saturday morning getting organized. Shred all but the last two monthly statements from banks, brokerages and credit cards (unless you need them for tax purposes). Start a “2010 Taxes” file to collect receipts and tax documents for this year. Work up a document with account numbers, rough balances, contact information and save both a digital copy and hard copy in your fire-proof box. Be sure your will and advanced directive for health care is up to date.

#2 Reduce Your Monthly Bills

Who wouldn’t like to save money every month? In many cases the only thing stopping us is ourselves. We get complacent. We don’t like change. But in some cases, you must endure changes to save money in the long run.

Take a look at your recurring monthly expenses and find ways to slash costs. Shop for cheaper car insurance. Ask your cable provider if they offer a basic package. Using just a fraction of your cell phone minutes? Move to a cheaper plan, or consider going pre-paid. Ask your credit card company for a lower interest rate. Even if you strike out at all of these, it doesn’t hurt to ask, and you could easily find ways to shave $50-$100 a month off your regular expenses.

Action Item: OK, so you spent Saturday morning getting organized. Spend Saturday afternoon shopping for better deals. If you find customer service departments closed for the weekend, make a note and call back Monday morning.

#3 Save Three Months of “Living Expenses”

This is essentially a bare-minimum household emergency fund. It won’t last long in a real crisis, but if you have debt, you need to get on with the next step, so avoid saving more than a few months.

Action item: Open a savings account at a top online bank and save three months worth of housing payments, plus enough for food and lights. That’s it.

#4 Get Out of Debt

With a small household emergency fund in place, turn your attention to getting out of debt. Household debt adds considerable risk to a family’s finances. It puts you so close to the edge, financially, that it doesn’t take much to push you over the cliff. Distance yourself from the edge by getting radical in your approach to paying off debt.

Action Item: Pay off 100% of your household debt, beginning with credit cards and any other unsecured debt. Sell stuff, donate plasma, get two part-time jobs – get radical and get out now! Your family’s financial future depends on it. More on how to get out of debt.

#5 Pile Up a One-Year Household Safety Net in Cash

Now that you are debt free, return your focus to emergency savings, but continue to work on items 5-8 concurrently, allocating a bit of your income to each step. How much? Do what you are comfortable with, but make reaching milestone a priority.

Over the years, I’ve waffled a bit on how much should be in a fully-funded emergency fund. Experts recommend 3-6 months of expenses. Some personal finance bloggers recommend establishing an emergency fund based on the number of dependents, or the number of people working in the household. Both are good ideas.

However, from this point forward, I’ve decided to offer the following advice to keep things simple: save one year of basic household expenses as an ultimate family safety net. Considering the recent recession (and the chance of a double-dip recession around the corner), the old advice of 3-6 months being sufficient to cover a period of unemployment or serious illness is, frankly, a joke.

Action Item: Save one year of basic household expenses in a highly-liquid emergency fund. Note, this should only cover basic household expenses. Luxuries such as cable, Netflix, XM radio, and gym memberships should not be included. Things like mortgage payments, food, the power bill, and transportation costs should be included.

#6 Build a Second Income

I can think of no greater hedge against unemployment than developing a second income stream. Even if your second income is a fraction of your full-time income, it may be enough to keep your house current and food on the table in a financial crisis. Part time gigs are a fine way to boost cash flow in the near term (a great way to get out of debt, for example), but I encourage you to look for opportunities to cultivate self employment income. Mow yards in your neighborhood. Learn to build fences and decks on the weekends. Start a blog or chase down freelance writing opportunities. Get creative.

Action Item: Start a side hustle at nights and on the weekends.

#7 Keep a Modest Stockpile of Food and Household Goods

I have known some people to fill entire rooms with stockpiles of food, and load up basements and storage buildings or garages with paper products and cleaning supplies. I have known others who have no more than tomorrow night’s dinner scattered about bare refrigerators and pantries. Like everything else, you have to find a balance that works for you.

We don’t like to shop, and have found that the more often we are in the store the more money we spend. So, we try to keep a small stockpile of food at home and only restock a couple times a month. In a real crisis, we could probably go a month or two without having to leave the house for food. Of course, we’d sure miss fresh fruits and vegetables, so we try to grow a few of those on our own using square foot gardening methods in our backyard.

Action Item: Clear a few shelves and stock with non-perishable (or long shelf-life) foods like rice, beans, canned vegetables, plus a small surplus of paper and cleaning supplies, toiletries, etc. Keep your freezer well-stocked with a variety of meats purchased on sale.

#8 Pay Off Your Mortgage Early

For us, the ultimate in financial freedom begins with having a paid-for home. Imagine not making payments to anyone for living space (well, except the local tax commissioner). No monthly mortgage or rent payments buys two very important things: You can build wealth much faster without house payments, and you can survive on much less income without a mortgage.

Action Item: Get busy paying off your mortgage early. Contact your mortgage company and ask about making biweekly payments. If they offer a biweekly plan, but charge a fee, pass and simply send in one extra payment a year (the math is virtually the same). If you are in relatively good shape, financially, have plenty of emergency cash saved, and are saving for retirement and kid’s college, consider throwing extra savings at the mortgage each month. Contact your mortgage provider and ask for instructions on making extra principal payments.

*This article was mentioned in the Carnival of Personal Finance 264th Edition

Weekly Roundup – Adam’s Update Edition

Posted on by  at  6:00 am
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Hey everyone, it’s Adam! Frugal Dad is feeling a little under the weather so I figured I would give this “Roundup” thing a try. I also wanted to give you a quick look into how things are going for my wife and me.

Our debt repayments have slowed a tiny bit over the last two months. We had a couple of big out-of-pocket expenses come up. My wife took a college course and her car tires needed replaced. Not that big of a deal thanks to our emergency fund, but it just stinks not being able to be more aggressive with the debt. We’ll get back on it again next month! ;-)

I hope to get back to posting next month as things are starting to get settled into place here at home.

The Frugal Roundup

Community Supported Agriculture: One Month Report. Mrs. Micah gives us a quick update on how her CSA project is going. Sounds yummy! (@Finance for Freelance Life)

Bigger Isn’t Always Better: Remembering to Appreciate What You Already Have. JD shares a great story about a recent stroll he took through town. (@Get Rich Slowly)

18 Things I Wish Someone Told Me When I Was 18. These tips are great for someone of any age. I am working on a few of them myself! (@Marc and Angel)

Best of the Rest

7 Ways To Find Services After Relocating

Posted on by  at  5:00 am
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About six years ago our family relocated away from the town in which I was born and raised. My mom had already relocated to this new city just a couple years before us and we followed her to get the kids closer to Grandma, which helped a bit since we were not completely unfamiliar with the area. However, we struggled with finding reputable services and were not sure who to ask for recommendations.

If you ever find yourself considering how to find services in a new town, here are a few ideas:

1. Angie’s List I resisted this one for a long time, but now wish I had signed up sooner. We are currently looking through reviews of general contractors in town to have a small project completed on our house. The new Angie’s List Health section is great for reading up on reviews of doctors in the area, too.

2. Coworkers One of the obvious resources to use after relocating for a job is coworkers. Not long after moving, we had some significant car troubles (beyond anything I could fix) and I dreaded finding a reputable auto shop. I asked a team member if he could recommend a decent auto shop and he was happy to recommend one – even offering to give me a lift back to work after I dropped off the car.

3. Church members Outside of work, fellow church-goers are often the people you will interact with most often. Ask around after Sunday school, or on your way to the parking lot after the service.

4. Hairdressers I keep my hair short, and in the height of my frugal days used to cut it myself with clippers. Because I could never get my neckline even in the mirror, and because my wife was scared to cut it, I had to find a cheap barber after relocating. After getting to know them, I’ve discovered a great resource for finding recommendations on other services.

5. Realtor Most real estate agents are well-connected with other businesses. Our Realtor was a great help in providing recommendations on school zones, neighborhoods, etc, and with getting setup with utilities, city services, etc. after moving.

6. Bank relocation team I used to work for a large bank in my hometown. They offered the services of a “Relocation Team” free to new customers who recently relocated to the area and decided to bank with them. The team distributed a welcome packet complete with information about the area, coupons and fliers from local businesses, and basically served as a help line for those new to the area.

7. Local magazine publications If you are new to an area, or are just stopping through and would like to find out more about the town, I highly recommend finding a bookstore and asking about any local newspapers, magazines, or trade publications. After moving, I picked up a copy of a magazine in our largest bookstore that featured news and events in the surrounding area. We learned about family-friendly things to do on the weekends, and even found the ads useful in hunting various service-providers.

You will find that people are generally happy to recommend someone if they received good service, and equally likely to tell you about places to avoid. If you haven’t made friends yet, or want to get a second opinion, consider hitting the Internet and doing your own research.

Any other resources we could add to this list?