Money Obedience

When I talked to a friend of mine yesterday, I mentioned the high percentage of people who owe more on their house than the house is worth. He told me that he was one of those people. I should not be surprised that I know a lot of people who are in this situation since about 25% of all mortgages are now larger than the values of the houses are. If one out of four friends could admit that my group of friends would represent the national average.

To say the least, it is obviously not so good if your mortgage is higher than the value of your house. But since I am the eternal optimist I would like to point out that such a situation is not all bad, (1) if you can afford to pay the mortgage and (2) if you neither want to nor have to move.

Hey, nearly all of us have to pay for housing one way or another. Unless you have a SugarMama or SugarDaddy (who might even be real Mom or Dad!) you either pay rent or pay off a mortgage. If you have your personal finances well organized, you should be able to afford what you’re paying to keep a roof over your head. If the difference between what you’d pay for a mortgage versus what you pay for rent is small, why not pay off a mortgage instead of paying rent? Over time the balance on your mortgage will go down and eventually the mortgage will be lower than the value of your house if all else stays the same. It may take a while, but nevertheless you will be ok at some point in the future if you keep making the monthly mortgage payments on a traditional mortgage. Another bonus – mortgages don’t rise! (Well, property taxes do, but you know where I’m going with this.) Rents rise according to the landlord’s dictates. So, if you can swing it, buying is better. Yes, even if you end up like many homeowners who owe more than the home value. (Hey, but don’t start out your mortgage that way, okay?)

This brings me to the next point. Surely, when your mortgage is larger than the value of your house, your net worth is diminished. It may even be negative. What that means is when you add up everything you owe and everything you own, you will owe more than own overall. Again, this is not a good situation to be in, but it does not mean that you cannot turn positive again. As I said above, as long as you pay off the mortgage balance you will turn the situation around at some point in the future. Then you will own more than you owe and you will have “something to show” for your labor. A nice life in a nice home, and some equity!

Let me give you an example. Say, you own a house that is now worth $200,000. Your mortgage is $220,000 and has a fixed interest rate at 6%. You owe $20,000 more on the house than it is worth. But you dutifully pay your mortgage every month. If you have a 30 year mortgage, your monthly mortgage payments will have taken the mortgage balance to $200,000 in about 6 years’ time. Then you are even with the value of the house. After that, each additional monthly mortgage payment will keep lowering your mortgage balance moving you into the positive. To keep the example going, after another 4 years your mortgage balance will have gone down to less than $185,000, which puts you in a much better position than the one you find yourself in right now. If the value of the house – $200,000 - does not change, your mortgage will be nicely below that and dropping further with each monthly payment.

Let me sum it up. Not all is lost of you find yourself in the unfortunate position that you owe more on the house than it is worth. The important thing is that you make your mortgage payments every month. Then you will be okay, eventually.