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This is not a column I wanted to write, and certainly not one your lender wants you to read.
But now that troubled borrowers are being given more options to save their homes, the question remains: Should they try?
There's no doubt that the future of our economy depends on slowing the foreclosure rate. After months of dithering, lenders and regulators are finally rolling out loan modification plans that may help many homeowners.
But what's good for the economy may not be good for you personally. Falling home prices and the details of the modifications mean fighting to save your home isn't a slam-dunk.
Unfortunately, in purely financial terms, sometimes the smart decision may be to let the bank foreclose.
Your payments will still be high. Most loan modification programs seek to reduce payments to 38% of the borrowers' income. I advise folks not to spend more than about 25% of their gross income on shelter, 30% at the outside. Otherwise, it's tough to pay your other bills and save for retirement. If you have big expenses other than your mortgage, such as credit card debt or child care costs, spending nearly 40% of your income on a mortgage could doom you to years of financial struggle and an inadequate retirement.
You may be "underwater" for years. Many troubled borrowers owe more on their homes than the houses are worth, meaning the borrowers can't refinance or sell without owing money to their mortgage lenders. Yet few lenders have been willing to reduce the principal borrowers owe. They'd much rather lower interest rates or stretch out the loan terms, turning a 30-year mortgage into a 40-year one, for example. (For a comparison of 30- and 40-year mortgages, read "Mortgages that outlive you.") No one expects home prices to turn around anytime soon, so if you're already underwater, you face the very real prospect of owing more on your house than it's worth for years to come. That's not just a drag on your net worth. It also means you could still face foreclosure down the road if you lose your job or need to move.
You may be far better off renting. In many areas, you can rent a place for much less than it would cost to buy it -- and that's at current prices. If you bought at the peak, you may be surprised at how nice a place you can get for the same amount, or less, than you're shelling out each month for your home. If you lower your housing costs, you'll find it easier to build up a savings cushion, pay off your other debt and otherwise stabilize your finances. Of course, your trashed credit from a mortgage foreclosure will make landlords wary, but read on:
The long, slow foreclosure process gives you an opportunity to save. I was furious the first time I read about homeowners living for free while their lenders foreclosed, a process that can take up to a year. It seemed dishonorable to stay in a home you weren't paying for. But again, in purely financial terms, it made sense, since people could save up the money they had been spending on mortgage payments, property taxes and insurance.
And a fat savings cushion can go a long way toward persuading a landlord to rent to you, said bankruptcy attorney Stephen Elias, author of "The Foreclosure Survival Guide: Keep Your House or Walk Away with Money in Your Pocket."
"You can offer the landlord a bigger deposit or even pay six months in advance," Elias said. "There are ways to make it palatable for a landlord to accept you."
Hope, honor, dreamsElias' mission, in his book and his practice, is to help homeowners realize that "foreclosure can be your friend."
Businesses know that they can take advantage of legal options to change or abandon the terms of the contracts they sign, Elias said, but individuals tend to be far more reluctant to do so.
"Just as people don't like to file for bankruptcy, they don't want to allow a foreclosure," Elias said. "They feel they should pay their debts."