Ryan – one of our Millionaires … In Training! – is upside down on his mortgage; if you can’t afford the payments (and, I have some guidelines to help you decide when that point has been reached), then I would generally suggest that no matter whether you are right-side up, upside down, or sideways, that you should get out!
But, Ryan is a high-income earner and high-saver already so he has decided to … well … I’ll let him tell you:
If I could wave a magic wand, I would not be upside-down on my mortgage, but that will correct itself over time as we are not planning on moving soon. While we could short sell the house and rent, we will not likely do that. We are emotionally tied to the house and would not, in my opinion have much upside with a rental because we would have to either float the note on our mortgage or pay the taxes on the difference on a short sale, all to pay MAYBE $1000/month less and not have the mortgage interest to write off come april 15th. An appreciation of our home of around 5%/year, starting in 2010, [should help by] bringing us back to an equity position around 2012.
A home performs two functions: housing and investment.
Like most dual-purpose things, owning your own home is probably a poor compromise on both …
… in my experience, you can usually rent a better house than you can afford to buy AND can usually find much better returning investments.
Yet, I recommend that one does own their own home, for a number of reasons:
1. Often it can turn out to be a person’s only investment,
2. It is a ’safety net’ in case all else goes wrong,
3. You have continuity of tenure (the ‘landlord’ won’t kick you out, as long as you keep up with the payments)
4. Over time, you may build up equity that you can ‘release’ to kick-start other investing activities.
For me, it was always 3. (and, the associated ‘emotional attachment’ that comes with calling your house your ‘home’) that held the most sway as I always expected to make my ‘fortune’ elsewhere. And, I have never actually used the equity for investing (except for my brief HELOC-fueled stock speculation experiment of 2007/2008).
So, I would suggest that you ask yourself the following TWO questions:
i) Can afford the payments? If so,
ii) If I were to invest in a house right now, given my current net worth, is this the house that I would invest in ?
If the answer to both questions is YES, then stay. If the answer is NO, then sell/move … be it into a rental or to purchase another (provided that the changeover costs/hassles are worth it).
This is a question that we all need to ask ourselves at least once per year (or, whenever the market and/or our financial position changes), as – in effect – we are ‘buying’ our house every year (by missing the opportunity of selling and putting the money to work elsewhere).
Given the size of our ‘investment’, we should never take the rent/own – buy/sell decision for granted 🙂