Many homeowners are contemplating whether they should continue to pay their mortgages or walk away from it as they struggle with the recession and the impact of falling home prices. When you consider the recent drop in value of your home, possibly below your mortgage balance (or both), you might be open to considering other options than you normally would. No matter what advice you get from friends, family, or advisors, it is important to consider the long-term consequences of this crucial decision.
Selling your property at a loss in a depression is a common way to sell assets. However, it may not be wise from a long-term perspective to walk away from your property. The current housing crisis is serious, but past experience can give some insight. Markets have historically recovered over time. Southern California is an example of a market that has experienced price declines and then recovered. In the early 1990s, there was a severe downturn that saw home values drop by 21 percent. The average price of a home recovered at 6.9 percent per year, which was the annualized rate for the 14 subsequent quarters. In 1990, the peak price of the cycle was at its highest. Homeowners who purchased during this period in 1990 have recouped their capital 10 year later. Markets recover in different ways. Some markets experience rapid price appreciation making it difficult for investors to predict the market’s future. It is generally the long-term holder who benefits from appreciation.
The cost of renting in many places can be higher than the mortgage payment after-tax. Renting is not as long-term as owning a house. These benefits include a forced saving plan that builds equity and pays down principal over time. You also have the security of not being forced to move by your landlord. Homeownership, unlike other financial assets is tied to factors you shouldn’t underestimate. These include the stability of your home, which can be used for your family and pets, and being part of a larger community. Even if the value of your home has dropped significantly, you can still reap tax benefits and compounding appreciation rates. The U.S. tax laws favor homeownership, especially for those who are in higher tax brackets. Tax shelters such as deducting property taxes and mortgage interest can help reduce tax burden and allow individuals to keep more income.
You could lose your home if you default on your mortgage. It’s a well-known saying. “My bank really owns my home”This does not reflect reality of ownership. Take this as an example: No matter the amount of the loan that you owe on the property the lender must go though a long and public process to remove your ownership rights. Foreclosure can have a significant impact on your credit score. Credit ratings are an asset that should not be overlooked. Not only will defaulting on a debt obligation negatively impact your credit rating, but it could also limit your ability to find a new home. Landlords frequently check credit ratings before renting. Your ability to obtain financing for a vehicle purchase, small-business credit, or employment may also be affected. It could take several years to rebuild your credit rating.
These are just a few of the factors to consider when deciding whether or not you want to move out of your home. Both personal and economic
Before making any short-term decisions that could be detrimental in the long-term, it is important to weigh all options.
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