September 5, 2017

People seem to have a death grip on real property even when it is ruining their financial lives.

If you sell your property whatever you get for it after paying the real estate commissions, the legal fees, outstanding taxes and utility accounts as well as any other liens for furnaces, water tanks and air conditioners that may be in place, and of course the mortgage is yours, all yours!

Amazing how many people have an interest in your home isn’t it?

Let’s assume your house is worth $250,000 and you have a mortgage of $150,000 the sale of your house may look something like this:

Property Taxes:                                    $1,500

Mortgage:                                         $150,000

Mortgage Penalties:                              $1,700 (or more)

Utilities:                                                    $300

Furnace:                                                $4,000

Real Estate Commissions:                  $16,950

Legal Fees:                                           $1,500

Total:                                                 $175,950

In that scenario you walk away with $74,050 in your shorts.  Or if you owe unsecured creditors, that money is available to pay other bills.

On the other hand what many people will do is refinance their home by either increasing the first mortgage or adding a new 2nd or even 3rd mortgage to access some of the money in the property.  In which case they are putting themselves at greater risk of losing everything they own.

By refinancing the debtor is typically adding tens of thousands of dollars in additional interest charges in addition to paying more legal fees and sometimes exorbitant brokerage fees, especially for private mortgages.  If you do not have the money available for the legal fees and the brokerage fees they will be deducted from the amount of money you borrow and you will pay interest on the fees as well as the actually money received.

By refinancing your property you will have an increased fixed expense each month that can effectively drain your resources and put you at greater risk of defaulting on other debt repayments.

Now if you borrowed an additional $50,000 on a second mortgage (at a higher interest rate) you would be at 80% of loan to value on the property and may have increased your household debt by $75,000.  If you were to voluntarily sell your property you might find that things look something like the following:

Property Taxes:                                    $1,500

Mortgage:                                         $150,000

Mortgage 2:                                        $50,000

Mortgage Penalties:                             $1,700 (or more)

Mortgage 2 Penalties:                          $1,500

Mortgage 2 Brokerage Fees:               $5,000

Utilities:                                                   $300

Furnace:                                              $4,000

Real Estate Commissions:                 $16,950

Legal Fees:                                          $1,500

Total:                                                 $234,150

In the second scenario you may walk away with as much as $15,850 in your pocket.  Now of course if you have been unable to make the payments on either of your first or second mortgages and the mortgagee commences a power of sale preceding you will have nothing left at all as any remainder equity will be chewed up in legal and administrative fees.

If you have unsecured debts you have no resources left to deal with them at all.