Just as buying a home is an emotional decision, defaulting on the mortgage and giving up a home is too. Any borrower who is deeply underwater and making payments in excess of a comparable rental would benefit financially from strategic default. That’s the math. However, defying the logic, very few loanowners are actually defaulting. People cloak their reasons with intellectual rationalizations, but it’s an emotional decision based on the desire to keep their family home and the ethical considerations that go along with the decision. As with any emotional decision, it may be right, or it may be wrong depending more upon the perceptions of the decision maker rather than some outside measuring stick.
Since this is an emotional decision, anything pertinent to the decision maker will have a profound impact on the number of people who actually decide to strategically default. Most people default because they can no longer take the emotional strain of trying to make payments they really can’t afford. Their willingness to endure this hardship is strongly impacted by what they perceive as the reward. Many potential strategic defaulters don’t because they cannot endure the loss of self respect that would go along with what they interpret as breaking a promise. Many others believe losing the family home would inflict more pain on themselves and their families than continuing to make the payments. For many, the additive impact of both of these factors compel them to endure the financial distress rather than seek the strategic default exit.
Another major weight on the decision-making scale is the perception of future financial reward. People bought houses during the housing bubble because they believed they would be rewarded with HELOC money or increasing value in their properties. The housing bust squelched most of these dreams, but hope springs eternal, and many are holding on with the belief the market will eventually make them whole again. The belief in this future reward can push a borrower in either direction depending on what’s happening with home prices. As home prices plummeted, so did borrower’s hopes of ever having equity again. Borrowers without hope of equity often strategically default. If it becomes a widespread perception that house prices are on the mend, the psychological impact on loanowners will be profound. Many who still may not have equity in many, many years will at least see the light at the end of the tunnel. Rising home prices give loanowners hope, and this hope will dramatically change the strategic default equation. In 2013, strategic default will become far less common.
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Proprietary Irvine Housing News home purchase analysis
$144,900 …….. Asking Price
$125,000 ………. Purchase Price
10/15/2001 ………. Purchase Date
$19,900 ………. Gross Gain (Loss)
($10,000) ………… Commissions and Costs at 8%
$9,900 ………. Net Gain (Loss)
15.9% ………. Gross Percent Change
7.9% ………. Net Percent Change
1.3% ………… Annual Appreciation
Cost of Home Ownership
$144,900 …….. Asking Price
$5,072 ………… 3.5% Down FHA Financing
3.56% …………. Mortgage Interest Rate
30 ……………… Number of Years
$139,829 …….. Mortgage
$46,066 ………. Income Requirement
$633 ………… Monthly Mortgage Payment
$126 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$36 ………… Homeowners Insurance at 0.3%
$146 ………… Private Mortgage Insurance
$250 ………… Homeowners Association Fees
$1,190 ………. Monthly Cash Outlays
($54) ………. Tax Savings
($218) ………. Equity Hidden in Payment
$6 ………….. Lost Income to Down Payment
$38 ………….. Maintenance and Replacement Reserves
$962 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$2,949 ………… Furnishing and Move In at 1% + $1,500
$2,949 ………… Closing Costs at 1% + $1,500
$1,398 ………… Interest Points
$5,072 ………… Down Payment
$12,368 ………. Total Cash Costs
$14,700 ………. Emergency Cash Reserves
$27,068 ………. Total Savings Needed
The property above is available for sale on the MLS.Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
Cost of Ownership AnalysisAre you ready to make an offer, but you are worried the cost of ownership is really more than you can afford? Don't make a mistake that might cost you the family home, your life savings, and your good credit! Get the advice of a seasoned professional. Contact us at firstname.lastname@example.org today! We produce detailed reports showing the cost of ownership based on the most likely transaction price and current financing terms. You will know how much you will spend each month in out-of-pocket expenditures and the true monthly cost of ownership factoring in tax deductions, loan amortization, and opportunity costs on your down payment. In addition, we show you how this cost compares to a rental of equal quality to make sure buying is the right decision for your situation. An OC Housing News Cost of Ownership Analysis will calm your worries and give you peace-of-mind. Let us show you the way! Reports are available for properties in the Southern California MLS coverage area, and are generally delivered within 24-72 hours. If you wish to receive multiple properties, please contact us at email@example.com, and we will prepare the reports for you.
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1 bd / 1 ba
639 Sq. Ft.
1 bd / 1 ba
639 Sq. Ft.
238 PINEVIEW Unit 4A
1 bd / 1 ba
684 Sq. Ft.