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November 2009 - Is it worth to keep your house at all cost?

Is it worth to keep your house at all cost?

☳ by Adam Aspilla

A house is usually the biggest investments in your life. That is why it is not unusual you are attached emotionally to it. Because of your emotional attachment, you do not let go of it despite experiencing financial difficulties. While it is good to protect your biggest investment, but at what cost? Your house’s equity is essential in making a decision.

Make a calculation of your house equity. If your house has an equity, i.e. if you sell your house now and after closing, your lawyer will write you a cheque  after paying out: balance of the existing mortgage, agent commission of about 6% of the selling price, legal fees, mortgage penalty, and other related expenses. The amount of the cheque your lawyer issues to you is your equity. 

On the other hand, your house has no equity, i.e. if you sell your house now, and your lawyer on closing date demands that you pay an amount to cover the shortfall, as the selling price of your house is not enough to pay out the above mentioned disbursements.

A good example was a couple who owned a house worth $400,000.00. It had two mortgages with a combined total of $405,000.00. The total mortgage amount was more than the value of the house for the couple maxed- out the equity of the house by getting a second mortgage before the recession. At that time the value of the house was high. After the recession, the value of the house collapsed. In addition, the couple was loaded with unsecured debts of over $50,000.00. They were in serious financial trouble.

The worse part was both mortgages were from private lenders for the couple could not qualify from banks because of credit rating issue. Naturally, interest rate was double than bank interest rate. The couple’s combined net monthly income was about $5,200.00. Out of that income $4,000.00 went to the mortgage monthly payments. Guess what?  The couple was emotionally attached to their house, they decided to keep it instead of letting it go and to consider consumer proposal or bankruptcy, to start all over again, and buy another house later after the process.

I could imagine this couple, could hold onto their house for not long for sooner or later they would lose it unless there would be a substantial increase of their monthly income. Ultimately, they would be forced to file consumer proposal or bankruptcy after throwing away thousands of dollars in monthly $4,000.00 mortgage payments which apply practically to interest only on a house with negative equity. Hanging on with their house under difficult financial circumstance, only prolong their financial pain.

It is worth keeping your house at all cost?  It depends. Yes, if it has equity, as above illustrated.  Why? Because if down the road you could no longer pay the mortgage, you may just sell the house and cash-in your equity than allowing the bank to take over your house through a power of sale. However, if it has no equity, as in the above couple’s case scenario, your ideal option is to let it go, to wipe out your mountain of debts as soon as possible and start all over again. 

In the above example, the couple was emotionally attached to the house and decided to keep it. Emotion should not be the primary basis of your decision. You have to consider facts and be realistic. Otherwise, you would sink deeper into debts.



Adam Aspilla is a Senior Financial Counselor of the Debt Clinic of Canada Inc. and the author of the book, You Can Negotiate All Your Debts. He also writes a biweekly column, “What Matters In Life” in “Taliba Newspaper. For free initial, professional and confidential consultation, please call 905-306-7572.