I did a lot of stupid things with money when I was a younger. In fact, I still make mistakes. We all do. But some mistakes are worse than others. This morning’s USA Today features an article that highlights eight money missteps that can really hurt you financially. Author Kathryn Canavan highlights eight economic deadly sins:
- Raiding your retirement accounts. I get a lot of e-mail from readers who want to generate quick cash by borrowing from their 401(k) or withdrawing the contributions to their Roth IRA. Most financial advisers warn against this, and I think it’s a bad idea, too. I’ve heard plenty of horror stories from folks who borrowed against their retirement only to have something go terribly wrong. It’s best to save your retirement funds for retirement.
- Walking out on a mortgage. “If you owe more than your house is worth, walking away is not your only option,” writes Canavan in the article. “For information about modifying your mortgage, go to MakingHomeAffordable.gov, a website sponsored by the federal government with the goal of helping the 12 million American families whose homes are now worth less than they owe.”
- Using credit cards to finance a lifestyle you cannot afford. This is the deadly sin I feel victim to when I was younger. I wanted everything, and I wanted it now. Rather than wait until I could pay cash, I financed my lifestyle on credit. Now, many years later, I’m finally using credit cards again. But I use them because I can pay cash, and not because I can’t.
- Falling for debt-consolidation schemes. When you’re deep in debt, it can be tempting to look for magic bullets. Those debt-consolidation schemes you hear advertised on the radio can seem so tempting! Who wouldn’t like to get rid of their debt all in one blow? But these plans aren’t magic bullets, and as my little brother learned, they can actually make matters worse. If you need help with your debt, find somebody reputable who can help. (Check with the National Foundation for Credit Counseling.)
- Co-signing a loan. I know, I know: You want to help your boyfriend or your sister or your son. And they promise they’ll change their ways and pay you back. But be careful. When you co-sign on a loan, you’re making a legal commitment, and if something goes wrong, you may find that you’ve not only lost money, but you’ve also lost a friend.
- Taking out a payday loan. Payday loans are a trap. They’re a stopgap measure that often snowballs for folks who use them. Usually, they just sink people deeper into debt.
- Using a reverse mortgage. A reverse mortgage isn’t necessarily evil, but it’s absolutely not a cure-all. In fact, reverse mortgages are suitable for only a very small portion of the population. As the article says, a reverse mortgage should be “a last resort, not a first resort”.
- Cheating on your taxes. Nobody likes paying taxes. But despite what your Uncle Joe might tell you, you are obligated to pay them. If you want to protest taxes, talk to the media or your legislators. Don’t take it out on the IRS, and don’t try to cheat.
Even during my worst years, I was able to avoid most of these mistakes. Although I was sorely tempted to cash at my retirement savings at one point, I never did. Instead, my biggest problem was using credit to finance a lifestyle I couldn’t afford.
Still, I know plenty of people who have committed more than one of these financial deadly sins. My younger brother has been guilt of many, though I’m hoping that he’s ready to turn things around. When he’s back on his feet, the advice I’ll give him for avoiding these problems in the future will be to become better educated and to prepare for trouble in advance. Education and preparation go a long way toward preventing financial mistakes.
[USA Today: 8 money missteps that can hurt you financially]
This article is about Choices, News, Odds and Ends
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I was in bad shape financially and took money out of my 401k to cover some expenses. Worse idea ever. I regret that but I’m building it back up again.
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I like that this list covers a huge range of situations, rather than just focusing on things poor people might do. For example, anyone could be tempted to cheat on their taxes.
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Lately I’ve been trying to flip personal finance “rules” around. Basically, if the rule is “save money by doing X instead of Y,” I will flip it around to “Save time and/or increase happiness by doing Y instead of X.”
But this list is 8 things that one should simply never do.
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My sister and brother in law live in Las Vegas and they know A LOT of people who have walked away from their mortgage. Some have even bought a new house with their currently okay credit and then let the old house just go into foreclosure. It’s amazing how many people I know who say foreclosure and bankruptcy are not as bad as you think.
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I absolutely don’t recommend anyone walk off on a mortgage.
I have seen articles where *some* of the people interviewed were willing to live with the negative consequences and found it beneficial.
What I REALLY found interesting about those articles is that the authors compared the thinking behind that tactic to several types of thinking the high finance industry did and that led to our current economic problems.
The big difference is that instead of a corporation doing it, the little guy does it and it is the corporation — banks that get left holding the bag. Apparently they don’t like foreclosures, at least in this market, as they aren’t getting any money back.
How ironic.
On the other hand, some banks are getting smart and cutting deals with people to not walk off on their mortgages, figuring it is better to lose some money voluntarily than to lose it all, as the banks are.
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I agree with this list 100%. I can sorta kinda understand the mortgage thing in some situations, where people who did nothing wrong are getting screwed by their banks, but I’d still rather avoid it. I’ve even heard stories of people who walked just because they were upside down; they didn’t have to move or sell, they just didn’t want to be upside down. Stupid. I don’t care if my house is worth $2, I’m still gonna live in it. (and hopefully get a break on my property tax!)
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Cheating on your taxes.
Nobody likes paying taxes. But despite what your Uncle Joe might tell you, you are obligated to pay them. If you want to protest taxes, talk to the media or your legislators. Don’t take it out on the IRS, and don’t try to cheat.
and don’t fly planes into government buildings
and don’t call up U.S. representatives threatening their lives.
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Years ago, I did raid my retirement account when making a huge lifestyle/career change. I don’t regret it. Otherwise I haven’t committed any other financial sins…(at least not any identified on your list!)
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JD -
I read your blog. Yeah, the whole thing!
I like what you have to say and how you say it. I have been sharing it with others – they like it too. Keep Up The Great Work!
Karen
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@beforewisdom (#7)
In my first draft of this post, I actually had “don’t fly planes into government buildings”, but I cut it. It’s the truth, though. Flying a plane into an IRS building because you’re upset about tax policy is like whacking an umpire on the leg because you don’t like the designated-hitter rule.
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I’m kind of tired of this distrust of people who need cosigners. What exactly are college students and recent grads with no job yet (or a job and massive amounts of student loans) supposed to do exactly, be homeless?
My mom is cosigned on my apartment, my car loan, and my credit card and has been for the last 5 years or so, since my junior year of college when I moved off-campus. If she had not, I would not be able to get an apartment. I would have no car (and hence very limited job prospects). I would have the credit card balance I’m paying off on a much higher-interest card (which was on an account I got in high school, which I also would not have been able to get without her).
A cosigner is NOT lending money. I pay my rent, my car payment (and I made my down payment as well), and my credit card payments (more than the minimum, and I’m not adding anything to it). A cosigner is there to provide insurance IF someone does not pay.
And yes, cosigning can be risky. But if you know someone well enough to know that they are responsible and can make payments, but simply don’t meet the income:payment ratio the lender is looking for, consigning is not necessarily a terrible risk.
Needing a cosigner does NOT always indicate that someone is financially irresponsible and prone to defaulting (I have never defaulted on anything in my life). It may just mean they’re young, they don’t have much credit history, they are in school, they have a high student loan:income ratio, or they make enough money to pay their bills, but not the right income:rent proportion to get a lease without a cosigner.
If needing a cosigner is so terrible and indicative of my bad character, please explain to me how, as a graduate student making $10K a year and making up the difference between that and living expenses/tuition with student loans I was supposed to get an apartment without one. And no, graduate student housing would not have been cheaper, and also would have made it impossible for my partner to get to his job on the bus, which he relies on because he has no vehicle. And now that I’m almost graduated, to to get a lease on my apartment without a cosigner, I’d need to be making at least 31K a year (assuming the apartment only wants rent to be 30% of my income and not 25%, which would mean $38.5K)…which doesn’t sound like much, but most of the jobs I’m seeing posted in my field are more like 24-26K. Sure, I could combine income with my partner, but he has lousy credit (through no fault of mine), so that might not help.
Seriously, all I’d like is for more financial writing to acknowledge that needing a cosigner is often a fact of life for young people, no matter how financially responsible, and that it doesn’t indicate irresponsibility or a moral failing.
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Yikes! I am sorry about the tight situation you have had Mel. And I understand what it is like. My husband and I still had our parents co-signing on our apartment when we were finishing up our undergrads.
I’m a little confused, if your partner is working, and has proof of income, why do you need a co-signer? Or can’t you simply live in a place where his salary could cover the rent?
Co-signing on an apartment is a little different. There is a more immediate telling on whether or not it will get paid, and loan somewhere off in the future may be less likely to get paid. Maybe?
Don’t take it personally about the co-signing thing. The point is simply that co-signing makes you vulnerable to someone else’s financial situation. My parents trusted my husband and I and they were willing to help with a signature. My husband’s parents are in a tighter situation. They co-signed for his student loans (and verbally promised to pay them back), but they didn’t save anywhere near enough for retirement. We are paying for his student loans fine ourselves, but the point is his parents are still in a very unfavorable situation, because if we defaulted, they would be forced to pay. Many parents need to put their financial situation first, and should not get into problems because of they are trying to help their kids.
Yes, you are right Mel. Getting a co-signer is often a fact of life of young people. And if parents aren’t there to help, certain loans and apartments are impossible to get. But if someone does not have a reasonable excuse for needing a cosigner (like, say, being a full-time student?), I would be wary of cosigning too.
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Sorry, two comments on this post. This one is about Borrowing from a 401k. My mom did take a “loan” from her retirement account to buy a vacation home she had been wanting for years. Before she borrowed, she did have a plan to repay it and did follow through with her plan. Though not intending, the stock she ended up selling at a high point and when she re-bought them she bought a number of things at a lower cost than when she sold them.
Taking the money from her retirement allowed her to have a “loan” from herself and did not have to take money from a bank and pay interest. Despite being laid off a decade earlier than she expected to stop working, my mom is by no means uncomfortable or in a risky position. My parents have both been extremely conservation with finances, and financial ups and downs have simply been the difference between retiring “well” and retiring “very well.”
I agree, as a rule you should never borrow against retirement, but when it is a small chunk of the pie, and you follow through with a pay back plan, maybe there is a time it would make sense for a few of us. What’s the point of money unless you use it to (eventually) buy the things you want/need?
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@Mel (#11)
Needing a co-signer is not indicative of bad character. The reason folks warn against it, however, is that it puts the person who agrees to help at huge risk for a debt that isn’t theirs. If somebody (like your mother) is willing to assume that risk, fine. But there are tons of stories and statistics to indicate that this is a terrible financial move in many cases. (I can’t remember where I read it, but I found a story recently from a woman who had co-signed on a loan for her sister, who then just skipped town with the money/stuff. When confronted, the sister basically said, “You were an idiot for co-signing. Not my fault.”)
So, yes, like all financial moves, co-signing serves a purpose. But it needs to be used carefully. It has a well-deserved place on this list.
Finally, plenty of young adults make it through life without needing a co-signer. I never had anyone co-sign on anything, and neither did my wife. I don’t think my brothers did, either, nor did many of my friends. I know that many young adults do go this route, but there are other options.
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I would co sign for either of my children on smaller things (the apartment, car or such). If push came to shove I could pay those things off. A house? Not likely.
Neither my parents or in laws co signed for anything for us. We lived in tiny places and bought junkers. It worked for us. I actually think we have it better since we learned to live well within our small means at the beginning of our marriage.
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Mel #11 is right. Our daughter is in college and needs us to cosign for her apartment. What in the world are we supposed to do, let her sleep in the streets?
Don’t cosign for people who proved to be deadbeats already- that’s advice.
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Taking out money that you don’t have to spend it on things you don’t need and can’t afford seems so wrong – but so many people still do it.
Always live within your means. In the long run, it will be for your own benefit.
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Loaning money to a family member is really a gift. Co-signing on their loan-is a loan. Yup I said it.
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I hate credit cards and this blogger name Rance Rob has an awesome commentary on the subject in his column Money Is Sex: Credit Cards are the STD’s of Finance Pt 1. Here’s the link
http://thefreshxpress.com/2010/04/money-is-sex-std-to-getting-rich/
This article fits nicely with Point number 3. I like all of these and they definitely fit in with some of my personal mess ups.
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I think JD’s point is not that people needing co-signers are bad. It is that before you agree to co-sign you need to be very careful.
I am a bankruptcy attorney. Probably one of the top reasons people have to file bankruptcy are that they co-signed a loan for a family member or friend who defaulted on the payment.
When somebody co-signs a loan for you and you default, the creditor will rarely go after you. It will go after the co-signer. By the time the co-signer knows of the default, usually the borrower is way behind on the payments and in the case of property has already lost it.
Further, usually the person defaulting on the loan really doesn’t want to default. That person is just forced to do so because of a job loss or medical illness. The creditor will not care about those things and still demand to be paid.
One should never co-sign on a loan UNLESS he or she can afford to make the payment. In addition, one should insist that the person one co-signs for provides monthly proof the payment is being made. If property is at stake, a co-signer should retain some ownership interest to the property so that if they have to take over payments they can at least keep the property.
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PS:
I disagree with the assertion that walking away from your home is always bad even if you can afford the payments. People generally buy homes partially because they are told they are investments. You pay the mortgage and build equity in the home. When you get older you can sell the home if you need money to pay for something such as retirement. Besides the interest write off, that was one of the main reasons to buy a home.
Today, however, these long standing premises aren’t necessarily true. Some homes have lost over half there value. So, for many people they are essentially renting because they will never in the foreseeable future be able to sell the home because they couldn’t get enough to pay the mortgage off.
So, if you bought the home not only as a place to live but as an investment the home may have lost most of it’s economic value to you. It is one thing to know you will get your mortgage payment back when you sell the home. It is another to wonder if you will ever be able to sell the house because it is so upside down. In the latter circumstance, you may never get your mortgage payment back.
If you own a home that has lost half it’s value due to irresponsible lending on the part of the banks the reality is for many people it makes sense to walk. The tax laws are very favorable right now for people trying to get out of their homes. For instance, it used to be the case if you caused the bank a loss you’d have to count that as income on your tax return. So, if you walk’d from a house and caused the bank a $100, 000 loss, you at one time would have to count that as income on your tax return. Ouch. For most people today, there is a temporary reprieve not requiring that loss to be included as income.
In my example, that is a potential $25, 000 tax liability. If the investment in the home is lost, it is better to walk when you won’t owe the tax liability.
Further, the tax benefit from being able to write off the interest on a mortgage does not always even come close to offsetting the lessor expense of renting. For example, if you can rent for $900 a month and have a $1, 500 dollar a month mortgage, buying might be cheaper if the tax refund that allows you to claim as a deduction mortgage interest offsets the higher rent. So, if the home causes you to get a $10, 000 tax refund, buying might be cheaper. If the tax refund, however, is only $5, 000 renting is cheaper.
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Mel, thanks for airing your views on co-signing. I also find that co-siging is a way of helping someone out when they need help. Even though sometimes people are bad and default, others never default! It’s therefore wrong to assume that each time you co-sign for someone, you are shooting yourself in the foot. Some people will keep their word and not default. I see it all the time and recently I cosigned for a friend to get a better phone deal and I know that if he defaults, my world will not come to an end. Helping people out should not be ruled out of personal finance otherwise we face the risk of becoming too selfish! It’s not the end of the world. It’s like always touting divorce to discourage people from getting married. Life happens, loosen up.
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Walking out on a mortgage.
Have to say, I don’t necessarily agree that this is really an appropriate addition to a list of “8 Financial Deadly Sins.”
In many instances it is far more damaging to your finances to stick it out (even with a modification) than it would be to just walk away.
Staying in a home that you can’t afford when renting would be many times cheaper, just because you made a stupid decision and bought more house than you could handle or bought at the peak of the housing bubble seems to me to be a good example of “throwing good money after bad.”
Every state has different laws regarding the financial obligation of a mortgager (i.e. – in some states the bank can pursue additional payment even after foreclosing on the house), but in some cases walking away can absolutely be the best financial decision.
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If ever there was a time when walking away from your mortgage makes sense, this is it. If you bought near the top of the bubble, you will never get back what you paid, so the options are either wipe the slate clean and start at zero, or keep paying off a loan for far more than the house is worth. If you live in a non-recourse state, it makes perfect sense to default. Especially the situation Shara describes where you can buy a second house (cheap) before your credit gets destroyed, then walk away from the expensive house. You don’t need to worry about your credit rating if you don’t use credit.
Gail Vaz Oxlade just wrote about reverse mortgages (in Canada). The illuminating part is that they are not subject to the same interest rate practices as regular mortgages, so in addition to all the fees you also miss out on the historically low interest rates.
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I’d like to point out, just because you are now under water on your house does not mean that you cannot afford it.
That is what I find idiotic about the whole “Making Home Affordable” program. If you could afford the payments when you bought the house, and you did not get an adjustable rate mortgage, and your income has not changed, then you can still afford the house.
It is not a guaranteed investment – nothing is. What happens when you buy stocks and they go down? You don’t just hand them back to your broker, right?
And this statement:
“If you own a home that has lost half it’s value due to irresponsible lending on the part of the banks the reality is for many people it makes sense to walk.”
It is funny how no one ever wants to talk about irresponsible borrowing. Show me one case where a banker held a gun to someone’s head… as much as banks wanted to lend, people were practically foaming at the mouth to borrow as much as they possibly could.
Sure blame the banker. As for me and my house, we take responsibility for our own actions, and the consequences of those actions. Maybe if more Americans were willing to do the same, we’d all be in better shape.
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“That is what I find idiotic about the whole “Making Home Affordable” program. If you could afford the payments when you bought the house, and you did not get an adjustable rate mortgage, and your income has not changed, then you can still afford the house.
It is not a guaranteed investment – nothing is. What happens when you buy stocks and they go down? You don’t just hand them back to your broker, right?”
I see your point, but what about people who bought, say, a starter home or a condo that now no longer fits their needs? Is it just tough luck for them and they have to stay for decades in a home that doesn’t work for them just because they made a bad investment?
Let me give you an example. I know someone who bought a condo in Miami for $300,000 five years ago. It is now valued at $150,000. He is now married and has a child. They would like to have another child but the condo is under 1,000 sq ft. They make too much money to qualify for any of the government’s assistance programs. They have a mortgage that they can comfortably afford, but it is impossible for them to move. I’m sure this story is not uncommon. What do we expect people like this to do? Do we really expect them to be stuck in their “investment” just because the housing market crashed? How were they supposed to know that their home or condo was going to plummet in value?
I’m not saying it is necessarily a good thing to walk away from your home, but I think in some situations it is understandable. I’m lucky that we only lost 10% of the value of our home and can weather the market turn and be okay. But in certain areas of California, Arizona, and Florida, the drop in value is so dramatic that it will be impossible for these people to recover.
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Jane:
So as long as housing prices are going up, and people can cash out refinance to buy crap, and then sell their house for a huge profit to buy an even bigger house, then all s well in the world?
I’m sorry to the guy who is stuck in the condo and wants more, but should all the US taxpayers shoulder the burden to buy them a new place, or what? LIfe is not fair – a gain is not always guaranteed.
There is absolutely nothing in the world you can buy and be guaranteed to make money when you sell it. I don’t know why Americans think its their right to always make a ton of money off their house when they sell it.
What do we expect people to do who are underwater on their car loans? No one complains about being underwater on the new Lexus they just bought.
The reality is, condo guy probably put 0% down when he bought the home, maybe even got a 103% loan. Then refinanced and pulled cash out to buy crap. Now he’s pissed that he can’t sell the condo and make a killing.
Tough.
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@wanzman: You know, back when my parents applied for their mortgage, the government strictly regulated the banks and so the banks had to be careful to lend money only to people who could comfortably pay them back. In my parents’ generation there were no “zero-down” mortgages. I’ve read that almost no one was house poor, spending too much on a home or apartment. Also, there were no offers on t.v. or anywhere else to “cash out” your home equity either. In my parents’ generation, no one had an outrageously high car payment, and car leases hadn’t even been invented yet. With my generation though, we could get a mortgage that was too big for us, and the banks were more than willing to help people do that too. I’m sure there were a lot of people who felt they could count on their mortgage lender to protect them. The banks had no business over-extending people, and took advantage (in my opinion) of people who just did not understand.
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We took out a tiny 401K loan once when we need some money fast for a travel opportunity. The only reason I’m not bothered by it is because the amount was really small and since we are only allowed to take out one loan at a time it’s preventing my husband from using his 401K as an ATM to get him out of trouble. I’m not paying this loan off early, even thought I easily could, because having it is security against him raiding the rest of it.
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Wanzman’s got it right. Folks caught up in the greed should not be able to cop out.
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Graduate school is terribly expensive. My parents were willing to co-sign, on my behalf, for some private loans to finance my education. Lucky for me, at the time they had dismal credit and the loans were not approved. I said “lucky” because while I was devastated it forced me to face a grim reality – I could not afford to go to graduate school full-time. I took a year leave of absence, found a full-time job, returned on a part-time basis. I also got married during that time, so with our dual incomes we were able to pay for a lot of expenses out of pocket. Co-signing oftentimes insulates the borrower from a reality they should be facing; it stunts creativity because people just look to debt to finance their dreams, it encourages people to have a type of selfish tunnel vision. Oftentimes working and middle class parents have a tremendous amount of guilt because they cannot give their children everything and will feel compelled to sign on the dotted line even though they are barely making ends meet and are perilously close to the edge of financial insolvency themselves. The best gift you can give your child, friend, or relative is force them to be self-sufficient. Instead of allowing them to reap the benefits of your discipline, instill in them the lessons life has taught you to be self-sufficient and disciplined. I would rather gift money, assuming I have it, as opposed to putting myself and my household at perpetual risk. People do not necessarily have to have a character failing to not pay, they could be sick, become disabled, got laid off in a recessionary market where people could more realistically perform magic tricks than get another job. Not co-signing avoids these issues and allows you to keep your sanity.
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Jane – I think that situation sounds crazy. So a nice couple with a kid can comfortably afford their nice condo, and I should feel bad for them? Wow, that sounds like a terrible problem.
DreamChaser57 – What a great story! I’m glad it all worked out well for you. You should write one of the Reader Stories about your graduate school experience.
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@29, LisaD.
LisaD,
Please be careful and take care of yourself. It sounds like you need more protection from domestic problems than having a 401K loan.
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While reading through the comments about walking away from a house where a person is underwater on their mortgage, one facet that is not discussed is who at the ends pays for it. On the surface, it may look like the bank is losing money, but in reality it is everyone who has invested in MBS (mortgage back securities). Many 401K funds and pension funds have MBS as part of their investment mix – some more heavily then others. Therefore, when you hear about someone walking away from their mortage because they are underwater (because it is more convenient for their financial situation), are you okay that they may be undermining your retirement planning? Just some food for thought …
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Joe…yup you are right. Thank you.
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Letting your career atrophy, or making a bad career mistake can be deadly to your financial health. Your career – for most of us anyway – is the cash flow engine that drives your finances. If you don’t keep it running, or get into an accident, you could be in a world of hurt.
I agree with the inclusion of the others listed as being financial mistakes. Good list, good topic. Sometimes its the person who avoids making mistakes but does nothing flashy that comes out better off than the person who makes a lot of good moves but made one big mistake.
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“It is funny how no one ever wants to talk about irresponsible borrowing. Show me one case where a banker held a gun to someone’s head… as much as banks wanted to lend, people were practically foaming at the mouth to borrow as much as they possibly could.”
Right, but those banks did give them that highly addictive drug called credit. Ultimately, it is the banks fault for creating and approving those jacked up loans so they could get that juicy closing cost. Or did those irresponsible borrowers hold a gun up to the bank and demanded that loan. I thought so.
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I respect everyone’s view on personal responsibility v. walking on a mortgage…other than a few financial setbacks due to untimely circumstances (deaths in the family without insurance, resulting funeral expenses, etc.), I recently made a decision to work with my lender in an attempted modification that did not work out and I was foreclosed.
Despite my short term circumstances, I could afford my house, I offered any upside up to the original principal to the bank should they work with me, and I fully disclosed my facts to the lender to engage in meaningful discussions. Btw, I never blamed the bank despite botching my loan modification paperwork as they have a process to adhere to and keeping me in my home was not a priority.
The process: I was told to stop payment so they can work with me (damaging my credit for the first time) and arrived at the conclusion that my terrible timing on the purchase (my responsibility as no one forced me to agree to purchase a million dollar home) was no reason to put my family’s financial future at risk…of course, I purchased in a nice neighborhood (bubble state) that experienced over 150 short sales or foreclosures in an 18 mo period of time prior to my foreclosure as I figured my $1m dollar purchase was worth $600k within 20 mos. I was wrong, we provided the house to the lender in immaculate condition and they listed it for $449K but wouldn’t talk to me at $700k. Unlike the feelings of many, I was not duped by the bank, the appraiser, the realtors or the mortgage broker (although I felt they could have listed it a bit higher)…”I” bought at a terrible time and understood my legal and tax risks (particulary to a future sale/relocation resulting in $100k+ tax liability) of returning the asset back to the lender. I had minimal debt relative to income before the purchase and have no debt after the foreclosure, but $7,500 per mo is real money for an asset underwater by over 50%…we have a great rental for less than 1/2 the cost of ownership and have already seen our credit scores dip from the 7′s to the 5′s and back to the high 600′s in the last 5 mos since the move.
Not a decision we took lightly given that our great neighborhood did not need anymore foreclosures (I apologized to my neighbors that my decision will likely continue the deterioration in the market as we search for a bottom; it didn’t help that the bank marketed the house at a discount to other comps), but in retrospect I personally have no regrets…
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While I can’t relate to most of these points (I’m still a college student), my biggest financial “sin” is probably yielding to the temptation of spending money on things that I don’t really need.
“Education and preparation go a long way toward preventing financial mistakes.”
I agree 100%. It’s always better to prevent than to cure. I just wish there were some financial education classes introduced in schools.
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“The reality is, condo guy probably put 0% down when he bought the home, maybe even got a 103% loan. Then refinanced and pulled cash out to buy crap. Now he’s pissed that he can’t sell the condo and make a killing.”
You make large assumptions about the finances of people you don’t know. Just because this is the reality for some people, and yes, many people used their homes as ATMs, some people who are in this situation didn’t. They just happen to be in one of the devastated markets. For the record, this person had a decent down payment and has not pulled any money out of the home. If you didn’t notice, I mentioned that he bought in Miami, one of the worst hit markets in the country. I think for those of us who don’t live in these areas, it’s hard for us to understand how you could lose 50% of the value of your home when you bought. We think that these people must have been stupid, greedy, or frivolous. But if you think that is the only way to owe 50% more than your home is currently worth in 2010, you don’t really understand what happened in these areas.
@Samantha
No one is saying these people are miserable or that their situation is akin to the tragedies of others who lost their jobs or can’t afford food or essentials. You can always find someone who is worse off. But I can also feel empathy for people who bought a home in good faith that they could afford only to see that home lose half its value. If you don’t think that situation sounds unfair or unfortunate, even if they can afford it, then I don’t know what to say.
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The whole “walking out on a mortgage” topic really bothers me. There seems to be an assumption that if your home is worth less than you owe on your mortgage, then something must be done. Why? Why is it assumed that your home must always be worth more than you owe on it? You believed your home was worth $300,000 when you bought it last year, so why do you suddenly feel you’re being ripped off because you still owe $280,000 on it, but some appraiser says it’s now only worth $260,000?
There’s a direct analogy here with cars. When you buy a brand-new car and finance the whole thing, then you spend at least the first year owing more on it than it’s worth. The second you drive it off the lot, it’s worth less than you owe on it! And yet, people don’t treat this like a major catastrophe. They don’t immediately turn around and go back to the dealership, demanding that they “modify” their car loan because they owe $20,000 on a car that’s now only worth $18,000. What’s the difference?
You signed an agreement, you felt the house was worth what you paid for it at the time, stick to your word and pay what you owe.
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@Tim (#23):
Your example would be a problem of “buying more house than you can afford,” and is a problem completely separate from the issue of walking away from an underwater mortgage. The “underwater mortgage” sin deals specifically with walking away from your home just because you’re underwater, and says nothing about the affordability of the mortgage.
If you’re struggling to make your payments, then that’s a whole other problem. Your payments don’t magically go up if you get upside-down on your loan, suddenly turning an affordable mortgage into an unaffordable one. You’re mixing two completely independent mistakes.
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@Aleks (#24):
“If you bought near the top of the bubble, you will never get back what you paid.”
So what? When you buy a new car, you’ll also “never get back what you paid,” but that doesn’t mean you just stop paying the loan and let them repo it!
Honestly – this thinking is just idiotic. I seriously don’t get it. It’s entitlement gone insane.
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@Jane (#26):
“What about people who bought, say, a starter home or a condo that now no longer fits their needs? Is it just tough luck for them and they have to stay for decades in a home that doesn’t work for them just because they made a bad investment?”
Of course not. Why would they need to stay “decades?” Presumeably, they’re actually paying off their mortgage at some point, aren’t they? Year 1, they owe $200,000 on a house worth $150,000. Year 10, they owe $120,000. Presto! – they’re no longer underwater. How is that forcing them to stay in the home? Heck, after “decades,” they should have the home completely paid off. How could anyone be “trapped” in a paid-off home? At that point, why does it even matter how much the house is worth, as long as its value is in line with the rest of the market? If her value is still down, then whatever she’s moving into will be less expensive, too.
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@Jane (#40):
“I know someone who bought a condo in Miami for $300,000 five years ago. It is now valued at $150,000. For the record, this person had a decent down payment and has not pulled any money out of the home.”
OK, hang on. Before I tear you to shreds on this, was the purchase price $300,000, or was his mortgage $300,000? Because if the mortgage is $300,000, and he had a “decent down payment,” as you say, and he hasn’t pulled any money out of the loan, then that means the condo must have been significantly more than that when he bought it. Let’s say it was worth $350,000 when he bought it 5 years ago. You’re telling me that this condo has dropped from $350,000 to $150,000? That’s a loss of 57% of its value.
If that’s what you’re trying to claim, then I’m sorry, but I call shenanigans. Sure, house prices have sunk terribly, but there’s no way a condo anywhere in the US (not even Florida) is currently worth 57% less than it’s 2005 value. Maybe it’s dropped close to that much from a peak value (which would have been in 2007/2008), but prices were still climbing in 2005. He didn’t buy at the peak. There’s just no way. Your friend is exaggerating.
And I agree with Wanzman. Someone who can service that kind of a loan does not deserve any kind of bailout whatsoever. He can muddle his way through this. Maybe he has to wait a little while before he has another kid. Life’s rough, get a helmet. There are far worse problems he could have.
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Jane, a 1000sq foot condo is not a box under a bridge, and it is large enough for four people to live in, assuming of course that these people are not caught up in the bigger is better and screw personal responsibility mantra that everyone seems to have.
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My parents successfully raised 7 kids in about 1250 square feet with only one bathroom. I knew other families raising up to 13 kids in less than 2000 square feet. We all grew up to be productive citizens. So I think the argument that they can’t fit 2 children into 1000 square feet is absolutely hilarious. Sounds to me like there is some other reason that he’s not talking about. If they really want a baby they can easily find a way.
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I don’t own a home, but I don’t know why people expect those who are underwater to stick around for moral reasons, when banks routinely walk away from deals that are no longer profitable, to get the loss off their books. The best example of this was probably that commercial real estate default that made big news a few months ago.
I don’t like double standards.
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I rather strongly object to the notion that walking away from a mortgage (i.e., a strategic default) is a bad financial move.
Choosing between seven years of bad credit or paying $300,000 for a $150,000 house (whether or no you can afford it), which seems a better financial move? (I’d say it’s not the one where you throw away $150,000.) Indeed, you have the right to default–it’s just that the bank gets the house…they wrote the contract, and they’d default if they were in your position. Strategic defaults are just part of doing business.
Also: loan modification isn’t a bailout (except for the lenders)…it’s an effort to prevent defaults, since foreclosed houses lead to insolvent banks, which lead to bailouts (or nationalization, or systemic collapse). Loan modification is *good*.
I don’t fully understand the flamewars over whether a 1000ft^2 condo is a suitable living space for a family or no…point being, the family’s insolvent. A short sale would be a better option, if they could negotiate it, but if they can’t they should default and rent for the next seven years (or get the spouse that didn’t sign the original mortgage to sign the next one).
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JB, firstly, that family is not insolvent, and secondly, that house will not be worth $150k forever. And assuming a 30 year mortgage, or even 15 years, by the time it is paid off (and they actually spent that $300k on the house), it’s going to be worth more than the $150k now. That’s simple inflation, even without a housing bubble in which people were willing to pay $300k for that condo. The family is not insolvent because their condo is worth $150k. The poster made no mention that they are unable to make their mortgage payments, and even if they are unable to, their mortgage payment did not change based on the current value of the house. They are not insolvent, they just can’t move into a bigger home right now without taking a loss on their current one.
If you bought a house with cash, and the value went down, would you go back to the sellers and demand they pay you back? Try that next time you buy a car or anything else and see how far you get. Not going to work. Yet because you borrowed the money, you think it’s okay to not pay it?
Ms. Clear, I am sure that most of us saying that it is wrong to walk away from an underwater mortgage would also agree that it is wrong when banks do it. But if the banks all jumped off a bridge, does that mean I should too? No? Then just because the banks do unethical things does not make it okay for me to.
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