Posted by Tim (Atlanta) on January 02, 2001 at 13:40:06:
Why would you think you made a bad decision based on the amount of money that you will pay in total for the property? You need to know what the current balance of the loan is (probably less than 45K) and the price that the home would sell for today. Your equity is the difference. It has NOTHING to do with the total amount of money you put into the home.
You don’t mention the term of your loan, but let’s assume that it is 10 years, giving you a payment of $545.97. So in total you would be paying $65,516.40 principal and interest over the life of the loan. Yes, you will probably not get that amount of money back. But you are talking about your primary residence, not an investment property. Using your formula, it would be very difficult to make money on your primary home.
If it is a 10 year note, the balance after 5 1/2 years (66 months) would be $24,690.84. If the home would sell now for that same $45,000, you could sell the home and get $20,000 back. So you have $20,000 in equity right now.
Think long and hard before you default on that loan. That default would go on your credit report and make it harder to buy any more property.
My husband and I are thinking we made a bad decision when we did a owner finance on a 9 year old mobile home 14x70 2 bed 2 bath with a unattached garage in a small town close to Branson, MO. The loan was $45,000 at 8% interest. We have had the home for 5 1/2 years now. After adding it all up we realize we are going to be paying with the interest about $70,000 for the home, we know we will never get that kind of money back out of it. We are thinking of defaulting on the loan. Is this a really bad decision, or do you have any other suggestions? We really would like to see some kind of equity for our investment!!!
Thank you, I would really like to get your imput before we do something.
Re: May have made a bad decision - Posted by Ernest Tew
Posted by Ernest Tew on January 03, 2001 at 06:36:20:
You are receiving very good advice as to whether or not you should default on your agreement. I would like to add a few additional points that you and others might want to consider:
If you were not buying a home, you would probably be renting. Add up the amount of rent you would be required to pay over the same period of time. But, don’t forget to allow for rent increases (about 4% to 5% each year). Then compare the costs.
After renting for the same period of time, how much equity would you be able to get back from a lease? The home and land would be debt-free.
While most of the mortgage payments consist of interest in the early years, it is tax deductible. That results in a reduction in the taxes you would otherwise have to pay. None of your rent would be deductible.
If you default, your credit will probably be damaged. Bad credit gets very expensive–in several ways. It not only makes it more difficult to finance a home, car or anything else it will costs more. With bad credit, you may still be able to get financing but the interest rate will be higher. That is a fact that most people don’t think much about: Suppose you are required to pay 12% interest when obtaining financing because of a flaw in your credit when it would have been available at 8% with good credit. The difference isn’t a mere 4%. It is 50%. In terms of the dollars you will pay in interest expense, 12% is 50% more than 8%.
And finally, if you don’t want to keep the property, work on finding a buyer. It may take a little time, effort, and creativity but it could be worth it to maintain good credit.
Re: May have made a bad decision - Posted by Blane (MI)
Posted by Blane (MI) on January 02, 2001 at 15:31:10:
Connie,
All of us who are homeowners have probably fallen out of our chairs when we read the bank disclosure which shows how much we pay after all payments. Only looking at your home in terms of your total dollars paid may exclude a number of other factors.
For example, it sounds like you have a plot of land. If so, how big is it? And you say it’s close to Branson, MO - hasn’t that been a boom town for quite some time? And if so, could property values where you live be benefiting from Branson’s good fortune? Make sure you consider all your options before deciding what to do with your home. As Tim pointed out, defaulting is probably your worst option. Don’t plan on owning another home for quite a while if you do that. Good luck to you.