Is My Home Worth Keeping?

THURSDAY, JANUARY 15, 2009

Apropos to my last post, today's front page on MSN.com had a link to this article by Liz Pulliam Weston titled "Is Your Home Worth Keeping?".  In the article she discussed how even a renegotiated mortgage payment may be so high that people can only afford to make it if they don't save for retirement and struggle with financial hardship, especially if they have child care costs or other debt.  She says that no more than 25% of gross income should be spent on shelter but most loan modifications set a goal of 38%.  Even worse, the home will likely not recoup its value for several years, locking a person in to a hardship scenario for years, making present life and future retirement very difficult.  

Obviously, if I am working to pay down my mortgage instead of banking the cash I have decided that my home is worth keeping despite losing $90,000 in value.  I could walk away, stalling the foreclosure process for as long as a year and living in my house during that time without making payments, saving the money instead.  I'd have over $50,000 saved if I did that, more than enough to convince a landlord to rent to my  with my now awful credit.  Then I could save for a couple years, another $50,000 at least, and pay 20% on a $500,000 home.  My debt on my current house won't be down to $400,000 three years from now unless I win the lottery. Staying is not the best decision from a financial standpoint.

What about the other costs of foreclosure?  The hassle of dealing with threatening letters and phone calls about being behind, the time and trouble spent maneuvering to stay in the house a little longer, the knowledge that I am bringing down the value of my neighbors' homes?  That is a huge cost in emotions and stress.  Then I have to find a rental place that takes pets and bad credit, and three years from now go through the lengthy and stressful process of home shopping.  This time around I will have a foreclosure on my record so I won't be getting the best interest rate, even if rates are still low three years from now.  As an added bonus I will be paying much higher income taxes for the next three years because I won't be deducting mortgage interest.  Yikes!

There are other intangibles that make staying worth it to me.  I love putting work into my garden, and a really nice garden develops over years.  I'd be delaying that by a few more years if I left my house.  I enjoy making things but put that off because I didn't know what type of house I'd end up in.  It seemed silly to build furniture and do metalwork for my dream Tudor Revival home only to end up buying an Eichler and having to start over.  Now I have a Spanish Eclectic house and am planning a whole houseful of furniture to build.  It takes time to do that and go to work, I don't want to waste several more years.  I'm in my mid/later 30s and time flies.

Last year I spent about 42% of my gross income on shelter, including my extra principal payments.  That is way over what I "should" be spending in order to not be in hardship.  Yet I put 10% of my pay towards retirement and put several thousand dollars into savings.  How can that be?  Three things: no kids, no debt, simple living.  The biggest thing I have going for me financially is that I have no kids.  Then I'd be facing a world of hurt with my mortgage.  Kids are expensive!  Also in my favor is that I have no debt; money I would have spent servicing debt went into savings and enhanced my lifestyle instead.  Lastly, I do not spend large amounts of money on clothes, shoes, shopping, vacations, etc.  Eating out is my biggest vice, but knowing I can afford it makes me feel rich.

I'd love to hear from other people in house poor situations.  What are your options, what are you doing, and why?

POSTED BY K-MONEY AT 9:46 AM

3 COMMENTS:

An iMperfect wIfe said...
Remember that foreclosure ruins credit for 7 years. So, if it takes 1 year to even complete the foreclosure you wouldn't be house or car shopping for at least 8 more years. Foreclosure is not the answer!

Good luck, I'm enjoying your blog.
JANUARY 16, 2009 12:49 AM

Miss M said...
I think sense of obligation falls into the mix as well. Sometimes the right thing to do financially is the wrong thing to do personally, I took this debt on and I'm not going to walk away. We are similar in ways, no kids, low debt (currently - I used to be drowning), and fairly frugal. Our mortgage is 28% of my income, Mr M doesn't earn much but we're still in safe territory.
JANUARY 16, 2009 6:11 AM

K-Money said...
@iMperfect - yes, it would be a bad thing to have credit troubles for so many years. So why is this only true for individuals and not corporations?

@MissM - that pesky sense of obligation! I get something intangible for sticking with something.
JANUARY 16, 2009 11:24 PM

NEW PERSONAL FINANCE CHALLENGE!!

WEDNESDAY, JANUARY 14, 2009

Seeing my savings goals written down made them seem much more tangible.  I realized that I had a long-time goal within grasp:  finishing my emergency fund!  After I posted the last post I went to my bank online and transfered the last $1000 to my emergency fund.

MISSION ACCOMPLISHED!!

Now, onto bigger and better things.  I felt so inspired that I decided to challenge myself.  As previously posted, I have a second mortgage that was originally $138,000 on which I now owe $128,000.  This second mortgage is part of how I financed my house - I did 100% financing with an 80/20 loan.  I thought I was doing pretty well with paying down this loan, but $10,000 in twenty months doesn't seem good enough.  Now that I am free of needing to put money in my emergency fund, I feel light, happy, giddy, and ready for a new challenge.

NEW CHALLENGE:  Pay off another $10,000 of the loan by the end of 2009!

I think I can do this!  I am already increasing my monthly principal payment to $500 (that is $6000), plus part of my regular payment goes to principal (about $140, equals $1680 for the year).  That means I only have to come up with another $2320 by the end of the year.  I still have $500 left from my extra January paycheck, now I only need $1820 of unplanned money by year's end.  No problem!

Stay tuned for progress in the 2009 Mortgage Challenge!

POSTED BY K-MONEY AT 10:00 AM
LABELS: 2009 MORTGAGE CHALLENGE

2 COMMENTS:

Miss M said...
Here's to success! Some days I think I should try paying down the mortgage, then I remember what a money pit it's been and I decide to hold on to my cash instead.
JANUARY 14, 2009 7:10 PM

K-Money said...
Yes, I vacillate about this too. It sometimes feels like sending good money after bad since I am underwater. Realistically, I make enough money to pay the mortgage and have no hardship so I don't qualify for any current refi/adjustment plan. Like it or not I am going to stay in the house so I might as well pay it down.
JANUARY 14, 2009 9:02 PM

Having a Plan is Important, also know your Goals

TUESDAY, JANUARY 13, 2009

Some people write blogs as a living, others just for fun, many are somewhere inbetween.  I started reading PF blogs because so much of the subject matter resonated with me.  I want to be more frugal, live a better life, and save more money.  Being part of the PF blogosphere seemed like a good tool to help me with my goals.

I melded blogging and personal finance together to develop some goals.  I mostly had these figured out already, I just hadn't articulated them.

GOAL #1:  
More saving, less spending.

PLAN: 
1)  No more buying things I want then paying off the credit card every month.  Pay with cash and when I'm out of cash I'm done spending.
2)  Save up for big purchases ahead of time.  Forking over a big pile of dough all at once really makes me aware of how much I am spending.
3)  Read personal finance blogs to keep up my morale and reinforce my good feelings about saving money and spending less.  Also to glean good ideas.
4)  I've lived off a cash spending allowance for years, keep doing that.
5)  Work extra hours when available and put the money towards savings.  (currently sidelined by minor injury)

GOAL #2
Develop a new personal finance blog.  This will be fun and add an element of accountability to my financial goals.

PLAN:

1)  Start blog.  (done)
2)  Not only read other blogs, leave comments both because I enjoy the dialog but also so that people will look at my blog.
3)  Read posts about how to develop a blog.  Some of those people are really experienced and have a lot of info to offer.  No sense reinventing the wheel.
4)  Keep a list of possible topics and start draft posts ahead of time.   That way good ideas don't get forgotten and bad ideas get a second look before they become public.
5)  Practice writing.  Like so many other things, practice makes better.
6)  Consider allowing ads on my blog for a tiny trickle of extra revenue.  Multiple streams of income are good!

GOAL #3  Pay off my second mortgage.  I owe $128,000 on a loan that was originally $138,000 twenty months ago.

PLAN:

1)  Make monthly additional principal payments.
2)  Increase monthly principal payments when my income increases. (I just increased from $300 to $500/month)
3)  Finish funding my emergency fund so I can start funneling more money to principal.
4)  Send part of all of any windfalls to principal.  This includes my income tax refund (or the two extra paychecks a year I get since I am paid biweekly).

GOAL #4  Finish saving for my emergency fund.  My goal it to have a minimum of four months of expenses saved.  
My monthly expenses (including my cash allowance) are about $5500 which I rounded up to $6000, therefore my goal is $24,000.  I have $23,000 now.

PLAN:

1)  Put money from my extra paycheck this month into savings.  Then this goal will be achieved!
2)  Continue to implement my plan to earn interest on this money instead of having it sit there and be eroded by inflation:  I am dividing up the money, every month another month's worth goes into a six month CD, plus one month liquid cash in savings.  My bank pays 1.16% for savings, 2.3% for 6 month CD.  I can still get the money if I need it all at once or within a few months if I have warning about needing it.  The main purpose of the fund is for if I become unemployed or cannot work due to illness or injury.
3)  Increase savings goal to 6 months of expenses once the second mortgage is paid off.

POSTED BY K-MONEY AT 3:25 PM
3 COMMENTS:

Money Funk said...
Some fantastic goals you've got there! PF Blogging is a great way to keep track of your journey (& meet some neat people). And you sound like you are heading on the right track! I look forward to further posts. ;)

JANUARY 13, 2009 7:23 PM
Miss M said...
I agree, you've got some great goals and you've already made a lot of progress. I need an emergency fund like you. I have savings and investments, guess what happened to the investments. I'm trying to get to $15,000 cash by the end of 2009 and hopefully $25,000 the year after.

I have no idea how to build a blog, I'm a newbie myself! I have adsense but unless you have a big readership it takes a LONG time to earn anything. You have to earn $100 to get paid out, after 3 months I'm only halfway there. But it's easy to implement and not too obnoxious.

JANUARY 14, 2009 6:30 AM
444 said...
Your goals and plans read almost exactly like mine (except the mortgage part, since I rent.) So there's a little comment for your blog; I bookmarked it, too. Leave a little comment and join my following, maybe? I'm brand-new and getting started, also. :)

JANUARY 14, 2009 4:01 PM

Self Reliance article

FRIDAY, JANUARY 9, 2009

I just read this article on MSN and enjoyed it.

self-reliance-in-3-not-so-easy-steps

The basic points are:

1. Go with cash
2. Be prepared
3. Train yourself in self-reliance

"Go with cash" is my favorite. I don't mean just pay off your credit card balance every month, but spend cash and keep the plastic put away. I used to be so proud of myself for paying off my balance every month yet I struggled to save as much as I wanted. I had no debt and was getting ahead a little, but I wanted save even more money. When I looked at how much I was spending I discovered that if I hadn't spent so much on the credit card I could have saved a lot more! What was I buying? Dinner out, things I didn't need, things I did need but could have waited a week until I got paid and bought with cash.

An experiment in life without plastic:

With the exception of buying gas, I basically stopped using my credit card for the month of November. Instead, I planned for big purchases like bulk buys of laundry soap, toilet paper, etc in advance. In order to buy something I wanted that cost $200 I put aside money from my paychecks and waited until I had the full amount, then paid cash. By the end of the month my usual rate of savings DOUBLED!

I let things slide a little in December. This month I am back on the wagon and looking forward to saving more money.

Utilizing small space to make the most of it

I added a picture of my house to the sidebar. It was taken last July when everything was green and lush. Amazingly, all that was planted in January and February of last year, from seed and bare root and mostly small plants. Before that the yard was a small expanse of grass. What we invested in was a rototiller rental and a truckload of fertilizer and mulch, that way we could plant small plants and get such amazing growth.

When one has a small space to live it is necessary to use every space as wisely as possible. Having a grass lawn seemed such a waste. It takes regular maintenance and doesn't serve much purpose. If we had kids or dogs we'd have them run around on the grass in the back, not the front. So I started thinking, how can we better use the yard? I also wanted the first project in our new house to be relatively inexpensive so we could learn more cheaply from our inevitable mistakes.

Some of the things we did:

1. Built three raised vegetable beds. Last year we grew a few different tomatoes, squash, and cucumbers. Now we have some lettuce. This year we will have more tomatoes as well as some herbs and other plants to be determined.

2. Planted roses. I love roses. One of the reasons I wanted to own my own home was so I could plant roses and they are part of what keeps me going when I think about how big my mortgage is. We bought bare root plants for cheap, planted them in good soil, and they did mostly very well. However, we don't have so much space that I will tolerate poor performers. We chose plants for looks and scent. The bushes that did not produce as advertised will be pulled and replaced with new bare root plants. I can get a free plant this weekend if I show up to help prune bushes at the local city rose garden.

3. Planted lavender. Walking the path to the house in summer smelled lovely and I had blooming bushes all year until just a couple weeks ago when a cold snap damaged the plants. Eventually I will harvest and use the lavender. It is one of my favorite scents.

4. Planted drought tolerant plants. This year we watered a lot to help the plants get established. Later we will be able to cut our watering way back.

5. Spread lots of mulch. This is good for plants, holds water in the ground and inhibits weeds.

The yard may look like it took a lot of work, and it did to get everything planted and install drip irrigation. Once everything was finished there was very little maintenance. I spent no more than two or three hours a month on average to keep the yard looking good, aside from the vegetables. It is so much easier than grass. An added bonus is the compliments I receive from passers-by.

Mistakes:

We started out buying topsoil and mulch by the bag before we discovered a local place where we could buy it in bulk by the truckload. This year we will buy more mulch that way.

We did not establish a compost bin. It will have to go in the back yard and we are going to tear the back apart this year or next so no compost bin this year, either.

We did not install drip irrigation in the vegetable beds. If we had the vegetable would have been as nearly maintenance free as the rest of the yard.

We bought more plants than we could reasonably plant right away. Towards the end we ran out of enthusiasm for planting and let the remaining plants die of neglect. That was a waste of money.

POSTED BY K-MONEY AT 3:46 PM


4 COMMENTS:

Miss M said...
I love your house, it's very cute. I like the garden in the front too, it's a great use of space and more "green" than a lawn. I confess my front yard is lawn, it's the dog's yard. I live on top of a hill and the back is steep and overgrown. I let the boys down there to play sometimes and they usually come back dirty and bloody from running through the brush. I keep my vegetables on the side of the house and my tomatoes in pots at the top of the hill. A drip system was the best investment I made, I'd lose plants from the summer heat and being too busy to water. I did a simple DIY system with parts from Home Depot, probably less than $100 total. I use a simple timer that runs on a 9V battery, set it and forget it!
JANUARY 10, 2009 8:52 AM

K-Money said...
Yes, we have a drip system for the rest of the yard, just not the vegetables. They went in last and we ran out of enthusiasm. Can you terrace your backyard at some point? A lot of plants thrive that way.
JANUARY 10, 2009 10:46 AM

Money Funk said...
Love the lavendar idea. It's such a nice smell. 

And I totally understand what you mean about the drip irrigation system. Would help 100%! I didn't install it last year. It really does make for more work. My other problem now... My cat... and a couple other cats... decided to make my garden a community litter box. So, I don't know if i will get planting this season as I must start anew. Hmph. Have any remedies for that one? :-)
JANUARY 13, 2009 7:59 AM

K-Money said...
Probably only the top 3-4 inches of soil are "littered". I think they will be OK to use later. I read about a composting toilet for humans and the soil was OK to use after a year, cat litter can't be worse than human. Just scrape it off and put it aside preferably in bin so they won't follow the smell and keep the pile "fresh". As for your vegetable area you could surround it with a couple feet of chicken wire to make it less easy access. Good luck with your garden!

Inspiration for a name

For months now all the economic news has been bad and everywhere I turn people are stressed out about it.  I have been reading personal finance blogs and wanting a blog of my own for some time now but wasn't sure what I wanted to call it or what type of tone I wanted to set.  Then I started thinking about something my grandmother said:

"People today talk about having a house with three beds and a bath, but I grew up in a house with three rooms and a path."

Wow.  Three rooms (rooms, not bedrooms!) for 11 people (two adults and nine children) with a path to the outhouse, in the middle of Nebraska.  Every time I think about that I feel so grateful for what I have.  Once grateful, my anxiety fades and it easier to think about what I can do to improve my situation.

Here's to a new year and working for a better life!

MY SITUATION:

I live in the SF Bay Area of California.  I bought a house in 2007 with 100% financing and a fixed rate mortgage that is worth about $90,000 less that what I paid for it.

Credit card debt: none (pay it off every month)

Student loan debt: none (paid off )

Car loan: none (paid off my 2007 car six months after purchase)

Retirement fund:  $80,000

Emergency fund: $22,000

Home Improvement fund: $1500

Money in stock account: $18,000

I've learned many important lessons about money and as a result made some good decisions that improved my position.  I've also made some mistakes which I will hopefully learn from and not repeat.  Here is an example of a good thing and a bad thing I did:

GOOD DECISION

I completed the general education portion of college at a community college.  At $50 a semester for tuition it was a bargain.  To finish my degree I chose a cheap university in an area with a low cost of living.  I also joined the National Guard so I didn't have to pay the full out of state tuition (making it cheaper than my home state).  I was able to graduate college with a manageable $15,000 in student loans and about $8000 in credit card debt (The trip to Europe I charged was worth every penny, the other stuff was not).  No place in my field hires per diem workers without a year of experience so when I'd worked for 11 months I started applying.  I put the money from my second job along with my yearly tax refund of about $1000 towards the student loans and paid everything off within three years.

BAD DECISION

I was living in a great rental house but planned to eventually buy.  I longed for a house of my own but realistically needed another 2-3 years of saving.  Then my father died.  I thought of all the things I expected to do but hadn't done and now he would never see them.  I wanted to go out and get started; I felt like I was wasting my life.  That was the impetus to buy when I did, after the housing peak but before the market went into free fall.  I knew intellectually what people were saying, that prices were going to drop.  I knew I didn't yet have enough for a down payment.  I let my emotions rule my wallet and now I am $90,000 underwater.

In future posts I plan to discuss other good and bad decisions along with whatever tickles my fancy about my underwater home, frugality, debt, gardening, and et cetera.

2 COMMENTS:
Miss M said...
I like the title, it reminds us how far our definition of need has changed in the last 100 years. My grandmother grew up on a homestead, I'm sure she never imagined the luxuries we have today. Our mistake is one of timing, we came in to the home buying age at the wrong time.
JANUARY 7, 2009 8:30 AM

K-Money said...
Yes, we sure did come in at the wrong time to reap the huge rewards of home buying. I try to view my life from the perspective of how much has changed between my grandparents and parents' time and now. It makes me feel tremendously better about my life now!
JANUARY 9, 2009 1:30 PM