We bought our first house in 2004, somewhere in the middle of that notorious housing bubble. It was by no means at the height of the bubble, thank goodness, but it doesn’t matter much, we’re still upside down on our house. The facts are: we owe more than it’s worth. This was no problem for us while our family was small- like it was when we bought the house as a “starter home”. We loved it. It was small but functional, and it was ours (well, the bank’s, but let’s not be nit-picky). But when we went from having two kids to having four, our 960 sq. ft. house went from feeling small to feeling cramped. We really needed to move. So we did.
We started renting a bigger house and renting out our house to someone REALLY nice who, as a favor to us, paid us what our actual monthly mortgage payment was. That nice big house we were renting was TOO big and had so many problems that we ended up moving back into our little house and looking at selling it so we could buy something else. Our asking price on it was what we owed on it, not planning to make money on it, just hoping we could get rid of it. While it was on the market only one couple went inside to look at it. It simply wasn’t worth the price we were asking for it. Since we couldn’t sell it, we decided to add on to it. We spent almost $10,000 drawing up plans, getting them approved by the county and moving our leach field (we have a septic system and part of that system was in the way of the add-on, so we had to have an excavator move it). In the end we didn’t get approved for a loan to add on to the house. I was crushed.
After much despairing on my part, we started looking into buying a second home. Amazingly we found a perfect house, just the right size with some room to grow, and that we could actually afford to buy.
We made sure that we would be able to pay both monthly mortgage payments (barely) in case we weren’t able to get a renter for the little house. Luckily my mom moved into the little house and we were able to get a little bit of rent from her. it’s $700 less than our mortgage payment, but it allows us to have money for repairs on the houses.
The problem: Hubby gets a pay cut next year of up to $280. And the year after that his cuts will end up equaling almost $500 compared to this year. If that’s so, we won’t have the extra money from my mom’s rent to use for repairs. And boy do we need repairs on both houses (I think we already have that “pox” on both of our houses). The new house’s roof leaks, the car port leaks and is rotted, our driveway doesn’t drain, the little house will need a new roof soon, the vinyl floor is ripping, it needs new carpet, and the deck is falling apart. These are all things we could totally deal with: if we weren’t getting those blasted pay cuts. And to top it all off, my mom is moving out. This could be good OR bad. Either we will end up with a really great renter who pays more than my mom, a really bad renter who pays more than my mom, or, horror of horrors, no renter at all. Life would be so much easier if we could just get rid of that little house.
But is it ethical?
Plenty of people are losing their houses these days. Some people just can’t afford their houses and despite their best efforts, lose their home they’ve worked so hard to keep. Still others just let their house go by refusing to make any further payments, just counting it as a loss of an investment.
This New York Times article talks about the new phenomenon that lately more homes worth more than one million dollars are being foreclosed on than homes worth less than one million. It says that “The rich are different: they are more ruthless.” “They may be less susceptible to the shame and fear-mongering used by the government and the mortgage banking industry to keep underwater homeowners from acting in their financial best interest.” True. I know I’m afraid of the consequences of foreclosure/short selling. I’m not sure what it would do to our credit, what the tax repercussions would be, not to mention if it’s ethical to just “let it go” if we are still able to make the payments. But it sure is tempting.
Obviously we should talk to a lawyer and/or accountant if we are seriously considering letting our house go. But ethically, what do you think? Should we keep making payments until we absolutely would not be able to survive without doing so? Or should we just stop making the payments so that we can have the money for our other needs/wants, including repairs on the house we actually want? We don’t need good credit for anything for the next several years. We have the house we want, good cars, and we would have enough money for any repairs they might need. But morally, is it right to default on a loan when we can still make payments on it? We made a commitment to our lender to pay back the loan and shouldn’t we try to keep our promises whenever possible? We don’t want to be liars or cheaters. But things are going to get really rough for us. That should we do?