Pay up or walk analysis

[djrobsd]

Ok, so I was a little bored this morning, and I did a little calculating. I’m making some pretty broad assumptions here which many of you will poke holes in, but here is what it could potentially cost you (unless you choose to live a debt free life and never buy another house or car on credit again)… I’m not even calculating the costs of higher credit card interest rates or anything here, someone else can probably add on to this thread with other “Costs of having bad credit”…

But…

Let’s say you own a home, and you can’t afford to make the payments any more. You somehow struggle and dig deep to keep up with the payments without going 30 days late while you try and sell the home. You keep reducing your price, until you get an offer, and the offer is so low you end up having to bring money to the table to get “out from under” your house.

While I’m not going to call out any specific “number”, because each person is in a different situation, here are the costs associated with walking away from your home JUST ON YOUR CREDIT, NOT COUNTING ANY DEBT FORGIVENESS TAXES YOU MAY HAVE TO PAY…

Auto Loan:
$30,000 out the door

Good Credit Rate: 6.5% (hey that’s liberal, some automakers are still doing interest free financing when they get desperate to sell a car)
Loan term: 5 years
Monthly Payment: $586/mo
Cost after 5 years when paid off: $5219

Bad Credit Rate: 30% (Yep, it’s true, 30% is the rate you can expect, even if you put lots of money down)
Loan Term: 5 Years
Monthly Payment: $970/mo!!!
Cost after 5 years: $28,236

DIFFERENCE: $23,017

So, with bad credit you will pay $23,017 more in 5 years on a 30k car loan….

What about buying another house, after you have recovered enough to be considered for a loan (and assuming they eventually open up sub prime again):

$350,000 House
30 year fixed (principal and interest)
Not including taxes, hoa, etc..

Good credit rate: 6%
Monthly Pmt: 2098.43/mo
Interest paid after 3 years: 61,000
Interest paid after 30 years: $405,000

Bad credit rate: 10%
Monthly Pmt: 3071.50/mo
Interest paid after 3 years: $104,000
Interest paid after 30 years: $755,740

Now I know with the home loan example, someone with a subprime loan isn’t going to keep it at that rate forever, but I’m just going to show that in 3 years, the guy who got a good rate pays $43,000 LESS in interest then the one who has bad credit.

So if you combine that with the interest paid on the car loan, you can see just how expensive it is to have bad credit, and suddenly you have to think twice about walking away from the house… Now I’m not saying this is for everyone. Obviously if you are $100,000 or more upside down on your home, you may have a hard time coming up with that kind of cash to sell your house, but if you are only a little bit short, it makes a lot more sense in my eyes to do what you can to get it out from under you.

Unless of course you want to live debt free for 7 years while you rebuild your credit. 😉

[patientlywaiting]

“Unless of course you want to live debt free for 7 years while you rebuild your credit. ;)”

What’s wrong with that? 7 years fly by in no time. It took me 3 years just to settle into my house when I bought it.

If you can’t live with a 7-year old car, there’s something wrong with you.

[Navydoc]

Patientlywaiting is right, those years go by much faster than you think, and you’ll be much more prudent financially as a result.

I’m fond of saying the best money is spent on education. Walking away from an underwater house is a strong business education.

When your hypothetical case scenario does rebuild their credit, it will likely be a much higher rating than they have now.

[kev374]

One correction…

People with good credit may be paying 6% on thier home but thanks to the bailout people with bad credit are paying 5%.

[seattle-relo]

In terms of mortgage rate, I read that 3 years after a foreclosure you can qualify for an FHA loan (as long as your credit has been perfect since) and that the FHA loan had fairly decent rates…I could be wrong…HLS do you have any info?

[seattle-relo]

In terms of mortgage rate, I read that 3 years after a foreclosure you can qualify for an FHA loan (as long as your credit has been perfect since) and that the FHA loan had fairly decent rates…I could be wrong…HLS do you have any info?

[seattle-relo]

In terms of mortgage rate, I read that 3 years after a foreclosure you can qualify for an FHA loan (as long as your credit has been perfect since) and that the FHA loan had fairly decent rates…I could be wrong…HLS do you have any info?

[seattle-relo]

In terms of mortgage rate, I read that 3 years after a foreclosure you can qualify for an FHA loan (as long as your credit has been perfect since) and that the FHA loan had fairly decent rates…I could be wrong…HLS do you have any info?

[seattle-relo]

In terms of mortgage rate, I read that 3 years after a foreclosure you can qualify for an FHA loan (as long as your credit has been perfect since) and that the FHA loan had fairly decent rates…I could be wrong…HLS do you have any info?

[kev374]

One correction…

People with good credit may be paying 6% on thier home but thanks to the bailout people with bad credit are paying 5%.

[kev374]

One correction…

People with good credit may be paying 6% on thier home but thanks to the bailout people with bad credit are paying 5%.

[kev374]

One correction…

People with good credit may be paying 6% on thier home but thanks to the bailout people with bad credit are paying 5%.

[kev374]

One correction…

People with good credit may be paying 6% on thier home but thanks to the bailout people with bad credit are paying 5%.

[Navydoc]

Patientlywaiting is right, those years go by much faster than you think, and you’ll be much more prudent financially as a result.

I’m fond of saying the best money is spent on education. Walking away from an underwater house is a strong business education.

When your hypothetical case scenario does rebuild their credit, it will likely be a much higher rating than they have now.

[Navydoc]

Patientlywaiting is right, those years go by much faster than you think, and you’ll be much more prudent financially as a result.

I’m fond of saying the best money is spent on education. Walking away from an underwater house is a strong business education.

When your hypothetical case scenario does rebuild their credit, it will likely be a much higher rating than they have now.

[Navydoc]

Patientlywaiting is right, those years go by much faster than you think, and you’ll be much more prudent financially as a result.

I’m fond of saying the best money is spent on education. Walking away from an underwater house is a strong business education.

When your hypothetical case scenario does rebuild their credit, it will likely be a much higher rating than they have now.

[Navydoc]

Patientlywaiting is right, those years go by much faster than you think, and you’ll be much more prudent financially as a result.

I’m fond of saying the best money is spent on education. Walking away from an underwater house is a strong business education.

When your hypothetical case scenario does rebuild their credit, it will likely be a much higher rating than they have now.

[patientlywaiting]

“Unless of course you want to live debt free for 7 years while you rebuild your credit. ;)”

What’s wrong with that? 7 years fly by in no time. It took me 3 years just to settle into my house when I bought it.

If you can’t live with a 7-year old car, there’s something wrong with you.

[patientlywaiting]

“Unless of course you want to live debt free for 7 years while you rebuild your credit. ;)”

What’s wrong with that? 7 years fly by in no time. It took me 3 years just to settle into my house when I bought it.

If you can’t live with a 7-year old car, there’s something wrong with you.

[patientlywaiting]

“Unless of course you want to live debt free for 7 years while you rebuild your credit. ;)”

What’s wrong with that? 7 years fly by in no time. It took me 3 years just to settle into my house when I bought it.

If you can’t live with a 7-year old car, there’s something wrong with you.

[patientlywaiting]

“Unless of course you want to live debt free for 7 years while you rebuild your credit. ;)”

What’s wrong with that? 7 years fly by in no time. It took me 3 years just to settle into my house when I bought it.

If you can’t live with a 7-year old car, there’s something wrong with you.

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