Monday, March 16, 2009

The Rules Have Changed Part 2: Covering Your Upside Down Mortgage

It was seductive.

The economy rewarded ever increasing home prices. You and millions of others were lured into the belief that if you continued to buy ever bigger or ever expensive homes, you would be rewarded with more and more net worth. There would always be a buyer willing to cash you out so you could walk away with thousands or hundreds of thousands in your pocket. Maybe you were one of those who bought two or more homes--one at the beach and another in the mountains--with the "knowledge" that you were moving faster down the road to higher networth because you had more than one property appreciating in value.

But now you've been caught with an illiquid asset that is worth less than what you owe on it. It might only be $10,000 or $20,000. But here in Northern Virginia, I personally know of many people who owe $150,000, $300,000 or even more than $500,000 on their homes than they are currently worth.

We know home prices will rebound. Eventually. We just don't know when or how long we will owe more than we can sell them for. But let me ask you a question: "What would happen if you or another income producing member of your household were to die before your home price rebounds? What would you do then?" Right now, the answer is that the surviving spouse will be left with a home they can't afford to pay for, and can't afford to sell because they owe more than it's worth.

What is a responsible solution? Not bankruptcy. That will ruin your credit for a long time. Plus, it's expensive in other ways. I've heard of quite a few stories bankruptcies that have hindered people from getting a promoion or a better job.

A ten year term policy to cover the difference in the value of the home vs. the mortgage is an good and inexpensive way to protect your family while you wait for home prices to rebound. Term policies are very affordable, and ten year policies are especially so. And, the younger and healthier you are, the less expensive they are.

It's worth looking into.

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