"I'm Trapped In My House"

In response to Median Home Prices In Detroit Fall To $6,000 I received the following from "GD" who feels literally trapped in his house.

"GD" Writes:

California may be getting all the press, but I don't think I've ever seen things so bad as in Michigan.

My own personal experience is a bad one. I bought my home in 2005 for $105,000. It appraised at the time for $124,000. I took out a bi-weekly 15 year fixed rate loan, and pay roughly $120 a month in extra principal on top of the extra payment you get on a biweekly. Those extra payments have translated into $30,000 of principal reductions in just 4 years. Yet, I am still underwater by at least $10,000 on my house.

I tried to refinance back in April, but since I do not have a Fannie or Freddie loan I was told not to waste my money starting the paperwork. I would have to have my home appraise at almost $90,000 to avoid paying PMI.

Meanwhile, similar homes to mine sell in the $60,000 range.

While most folks make a business decision to walk away, morally to me I don't believe in it. My issue is one I am sure a lot of folks are facing. I need to move and cannot. It's one of the worse feelings in the world to be trapped literally and unable to do anything about it.

Keep up the great writing Mike, you've got one of the best written and most informative financial blogs on the net.

Sincerely

GD

Thanks for sharing GD. I am sure many people are in your situation. It is one of the reasons the "move up" market is dead and is likely to stay dead. People do not have enough equity in their house to sell, short sales are hard to come by, and those unwilling to walk away are as you say literally trapped.

I discussed this situation recently in Walking Away Revisited - Reader Mailbag - Moral Dilemma. In Walking Away Revisited, "SS" was facing a moral dilemma and was leaning towards walking away. "GD" does not want to.

Each person has to decide these things for themselves, but I suspect most will attempt to hang on. Some will hang on for moral reasons, others because they do not understand their options, still others because they simply cannot decide what to do.

There is no right or wrong answer. Everyone has to make a decision they and their families can live with. However, if one is going to eventually decide to walk away, it is in their best interest to do it sooner rather than later.

Economically it makes no sense to pay down principle by $30,000 then decide to "walk away" later. That said, sunken costs (paying off principle is a sunken cost) should not influence current decisions. One must always evaluate these decisions based on current conditions, not based on what one could have done earlier.

In this case, as long as one cannot walk away because of moral reasons, there is no decision to be made. Good luck to you and your family "GD". We wish you well.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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