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Making the Right Decision For the Long Term

As homeowners struggle with the recession and impact of declining home prices, some are considering whether to continue paying their mortgage or simply walk away from the obligation. As a homeowner, when you contemplate the recent decline in your home’s value, perhaps below your mortgage balance, you may consider options that normally would never have entered your mind. Regardless of what you might hear from relatives, friends or advisors, you need to carefully consider the long-term impact of this important decision.
Like selling any asset at a loss during a depressed period, walking away from your property may not be a smart move from a longer-term perspective. While the current housing crisis is severe, past history provides some perspective. Historically, markets have recovered over time. One example of a regional price decline and subsequent recovery was in Southern California, which experienced a severe downturn in the early 1990s that saw home prices decline by 21 percent from their peak. However, prices recovered at an average rate of 6.9 percent per quarter, annualized for the next 14 quarters. Homeowners who purchased at the peak of the cycle in 1990 recouped their lost capital 10 years after the downturn began. Appreciation rates vary, and markets recover unevenly with some experiencing rapid price appreciation, making it difficult to time the market. Therefore, it’s generally the long-term holder that benefits from appreciation.
In many communities, the cost of renting can be more than the after-tax cost of mortgage payments on a house. Renting does not provide the long-term benefits of ownership. These benefits include a forced savings plan (paying down principal and building equity over time) and stability of knowing you will not be forced to move at your landlord’s whim. Unlike other financial assets, homeownership is also tied to factors that should not be underestimated, such as the stability of a sustainable home for your children and pets, as well as being part of a community. Even if your home’s value has fallen significantly, tax benefits and compounding appreciation rates can still be on your side. U.S. tax laws still favor homeownership, particularly for those in higher tax brackets. The tax shelter of deducting mortgage interest and property taxes can reduce the overall tax burden and enable individuals to keep more of their income.
Defaulting on your mortgage can have implications beyond just losing your home. The familiar saying, “My bank really owns my home” does not reflect the realities of ownership. Consider this: Regardless of the size of the loan you owe on the property, if you default, the lender must go through a lengthy and public process to take those ownership rights away from you. The process of foreclosure can be particularly damaging to your credit. Your credit ratings are a valuable asset that should be protected. Defaulting on a debt obligation will not only impact your long-term credit ratings but could limit your ability to secure a new place to live, as landlords often check credit ratings prior to renting. Also, your ability to qualify for certain employment, maintain a small business line of credit or obtain financing to purchase a car may be impacted as well as potentially taking several years to reestablish your credit ratings.
These are just some of the considerations in evaluating whether to stay in your home. Both economic and personal
decisions should be balanced before making a short-term decision that may not be advantageous in the long-term.

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