The Problem with “Maxxing Out”

As we all know, there are lots of people who are in deep trouble with their mortgages. The bought their house during the “frenzy” with ARMs and other exotic mortgages and now the time has come to pay the piper. The rates adjusted upward and now their monthly payment is unaffordable. Worse, yet, is that the value of their home has declined and they can’t even refinance into a fixed rate mortgage or something else to keep their payments affordable.

They’re what we call “under water”.

Thus, people threw up their hands and either flat out walked away from the house without making another payment or tried to sell the house in a short sale in the hopes that the bank will let them off the hook. Others are declaring bankruptcy and staying in their homes (where else would they go?) until the sheriff shows up at the door with the eviction notice.

Bad news all the way around.

Another Scenario

There is another scenario which is not quite as dire but equally disappointing. It’s about the homeowner that bought their house near the beginning or middle of the “frenzy”. Maybe they bought it with a fixed rate mortgage (a lot of people did, believe it or not). The interest rate was good. The payment was very affordable. Best of all, prices were climbing. In fact, they weren’t just climbing they were skyrocketing. In the MD Suburbs of DC is was not uncommon for homes to appreciate about 25% per year.

So this homeowner who bought their house at a “low” price decides to refinance and take some cash out of their new ATM machine (”the house”) or take out an Home Equity Line of Credit (HELOC) which comes complete with a checkbook and debit cards that look just like Visa cards! Wooooo! Hooooo!

What do you do?

pay for the kids’ college tuition
buy a new car
take a nice vacation
get the big flat screen you always wanted
put an addition onto the house
new carpet, new kitchen, new bathrooms, new….new….new.

Sounds great doesn’t it. That’s exactly the way refinancing and equity lines were marketed, too. Prices would go up forever.

What Happens When Prices Don’t Go Up Forever

When prices eventually stopped rising and then started falling people could no longer treat their homes like an ATM machine. They couldn’t continue to take money out of the house.

Here’s the really sad part: they can’t sell the house either. You see, in this scenario, the homeowner is still able to make his or her monthly payment. It’s just that they have already taken all the equity out of the house and now they no longer have any room to be able to sell the house, pay the costs of selling the house and move anywhere else. Literally, they are stuck. The bank is not going to “let them off the hook” just because they already enjoyed their equity.

Here’s some of the breakdown:

½ of the transfer and recordation fees due to the State and County governaments (~2.4% of the sales price of the house)
fees due to settlement company to conduct settlement and transfer legal title to the new owner
paying off your mortgage or any additional mortgage or equity line
credit to the Buyer for their closing costs (could run anywhere from 3% to 6% of the sales price of the house)
any property taxes that might be due
and home owner association fees that might be due

Do you know what’s missing from this list? Give up? It’s the fee for your Realtor! That’s right. Even if you sell your house For Sale By Owner, you’ll still have quite a few pennies to shell out in order to sell you house. Even if you sell your house For Sale By Owner you may still need to pay a Buyer’s Agent (after all they represent most of the buyers out there), you’ll have to pay any marketing costs for advertising, etc.

So assuming that you do it yourself, it still ain’t free. You still need to factor in what we, in the profession, refer to as the “cost of sale”.