Deplete Savings? Or Own a House Outright?
I’m estatic. I just talked to a client who read this blog, followed my advice, and now owns a house outright. Sound too good to be true? I disagree. It’s been a while since I’ve discussed this issue, so let’s revisit the topic …
Through my years as a foreclosure defense attorney, I’ve encountered countless homeowners who share the same type of story. Unemployment or underemployment led to financial problems and a mortgage default. Not wanting to go into foreclosure, these homeowners pulled monies out of a 401(k), IRA, or savings account to stay current on the mortgage. Eventually, though, the savings were gone, yet the monthly mortgage payments still kept coming. As a result, the homeowner had no money, yet was still facing foreclosure anyway.
The client with whom I spoke today read this blog (which I wrote back in 2010), realized his savings were dwindling, and didn’t let himself fall into this trap. Instead, he took his remaining $50,000 in savings, saved money while he didn’t pay the mortgage on the house he was living in, and purchased a home, outright, for cash. He has now moved into that house and declared it his homestead. As a result, guess what? Even if the bank forecloses on his old house, and even if it gets a deficiency judgment, it can’t take his homestead, which he owns outright. In fact, even if he loses his job later on, and has to declare bankruptcy (to eliminate the deficiency), he can still keep his homestead, free and clear. All of the money remaining in his 401(k) and the college plans for his kids – that remains in place, too, safe from creditors.
In my view, this is the perfect way to handle this type of situation. Instead of spending all of his savings, having nothing, and getting sued for foreclosure on the house in which he’s living … basically, winding up with nothing … he used his savings (and the money saved while not making payments on his old house), bought a new house outright, moved in, and declared it his homestead. Instead of nothing, he has a house that he owns, free and clear.
Think about how much different this man’s financial future will be simply because he strategized in this manner. No matter what, he has a house. No matter what, he has money saved for retirement and his kids’ college. All it took was the realization that continuing to make monthly mortgage payments on a house he couldn’t afford was not a long-term solution.
If there was one thing I wish more homeowners realized, it was that this approach is almost always better than depleting savings accounts to make monthly mortgage payments the homeowner simply can’t afford.