Milestones
By Miles H. Barber

If you own your home should you keep it?

Or should you take your lumps and sell your house in this soft market and rent an apartment or condo?

Many of you are "underwater" with your home value worth much less than you paid just a few years ago. If you refinanced and borrowed to buy a new RV, second home or send the kids off to college, you are not alone.

So, what are your options?

If you are struggling to make your payments, this is the new normal. You might even ask, "Why should I continue to make payments on a house that is worth $100,000 less than what I owe."

Good question and glad you asked.

When your home was worth $100,000 more than you paid, you were making payments and enjoying your home. You did pick that home because it was what you wanted for you and your family. You probably didn't buy your house with the idea of making a bundle by selling it in a few years. This was an investment for your future and that is why you bought a 30 year mortgage.

Now that your home has dropped in value, what core factors have really changed? You still enjoy your home, it serves your needs and it is what you want for yourself and you family and you still have a 30 year mortgage with a few years knocked off.

If you sell your home at a reduced value, you have the potential of incurring a loss of your capital which may take decades to recover. Remember, if you put 20% down on a $600,000 home and it is now worth $500,000 you have $120,000 of your money at risk.

The bank stands first in line and they will get their $480,000 they loaned you when you bought the house. So, you would end up with zero after fees and closing costs.

On the other hand, if you stay in your home and continue to make payments for the next 20 years, and your home increases in value at even 3% a year, it will be worth a million dollars. When you sell at that time to retire your $120,000 investment has increased to more than $650,000. Isn't that better than taking a $120,000 loss?

In addition, whether you have thought about it or not, Uncle Sam is actually assisting you when it comes to making your mortgage payment. For every dollar you spend in interest you receive a tax deduction. In the early years of your mortgage most of your payment is interest.

If you sold your home with the intention of renting a comparable property, your rent may be $2,500 a month or more. If you continue to make payments on your current mortgage of $480,000 the payment would be $2,577 per month. Forget taxes and insurance for a minute and just consider these numbers.

When you rent there is no tax relief.

With your mortgage payment initially, about $2,400 each month is deductible.

That's a whopping $28,800 a year tax break. If you are in a 30% tax bracket that reduces your taxes by $8,600 a year which makes your monthly mortgage payments $1,857.

There is another issue you should be aware of. Because so many folks have lost their homes or giving up their homes (for some of the reasons listed above), the rental market is becoming tighter. Rents in Silicon Valley have increased by 14% this past year and the trend continues.

If you have a thirty year fixed rate, ride it out. If you don't have a fixed rate, refinance and get one. With current fixed rates in the 5% range you won't have an increase for the life of your mortgage and hopefully never have another opportunity for such low rates.

And, if you still have a mortgage interest rate of 6% or more, refinance and get a lower one.

You may save enough money to pay your taxes and insurance.

Miles H. Barber can be reached at Scweekly2011@yahoo.com