Thursday, July 17, 2008

One man contemplates a Money Grab

Is it legal? Is it morally acceptable? Is it ethical? Would I be comfortable if the newspaper printed a story about it? And after all is said and done, is it the right thing for me & my family?

I had a conversation with somebody this week which sent shivers down my spine. He told me about his plan, and asked my opinion.

Here's his plan.

He bought his house in early 2006 for about $400,000, putting down 10% and financing $360,000. (assuming a fixed rate mortgage at 6.25% gives him a principal & interest payment of $2,217.) His home is worth about $250,000 today, judging by a few of the same floorplans currently for sale. He believes that if he's patient and negotiates well, he might be able to buy one of those homes for $225,000. (that remains to be seen, but let's believe him for the time being.) If he made a 10% down payment on that house, he would finance $202,500 with a monthly payment of $1,247.

What if he buys the new home, which is basically the same as his current home. Then, once he's moved in, he'll stop making payments on his current home, and just give it back to the bank. His credit will show a foreclosure, but he's not planning on moving anytime soon. His car is new, so he won't need to finance a car for a few years either. The rest of his credit accounts will remain in good standing.

Looking to the future, it wouldn't matter what the house is worth, or what time period you're considering, since both homes will always be worth about the same. $300k? $500k? $700k? Either way, he will have about $150,000 additional equity in the home, AND he will be paying about $1,000 less per month on his mortgage payment.

Here's my opinion.

Wow - those are staggering numbers. I don't think it's illegal, although I would consider consulting with an attorney before doing this, as I'm not sure if the bank has the right to sue you - if you can't prove the inability to make the mortgage payments, could the bank win a judgment against you for the $150k? (maybe a breach of contract lawsuit?) As for morally / ethically / front page of the newspaper - I don't like it, but it's not my choice to make. I'm not a moralist, and I don't claim to be perfect, but this does sound a bit shady. On the other hand, you're talking about saving a tremendous amount of money over the course of 15 years - money I'm sure you can use for kids' college &/or retirement.

I try pretty hard to live up to my commitments, and we both made commitments to our mortgage lenders. Personally, I'm not ready to follow in your footsteps, if that's what you're asking. On the other hand, I'm sure we all have a price. Would I follow your plan if I could come out $1 million ahead? $5 million? Hmmmm - I can't say "no" definitively... So we're really just talking about each person's threshold; that's what scares me.

Your doesn't like the sound of this plan Realtor,

Chris Butterworth

[tags] keys for home [/tags]