If Payday Loans are Necessities It May Be Time to Rent
Last September, Sadie Frankel of Pasadena, Calif., had to use payday loans consistently throughout the month to cover her bills. She said, “When I got to the point where I needed that extra money to pay for necessities, I knew I needed to do something quickly.” Frankel did do something quickly—she downsized. “It’s just a better life. It really is,” she said.
More and more consumers are letting go of their mortgage payments and renting. Shana Richey, of Palmdale, Calif., also moved to renting status. Her home declined in value more than 50 percent since she purchased it in 2004. Her decision was to get rid of her $3,700 mortgage payment and rent a larger home for $2,200. She said, “I don’t have to worry about paying property tax, homeowners’ insurance, the landscaping, cleaning the pool or any repairs.”
Time to rent
Experts say the most important warning signs that indicated it was time for Richey to make the move were:
- Having purchased the home with a no-down-payment loan
- Paying $430,000 for the property, well over the market value
- The 50 percent decline in value
The other sign was when her negotiation efforts with the mortgage company didn’t work. The fact that her home was valued at $200,000 post-recession left her with a loss of $230,000. When she requested a mortgage modification from her lender, she was offered a monthly payment of $3,300, just$400 less than her old payment. In the end, she ended up short-selling the property for $195,000.
Know the signs
Analysts are coming to the conclusion that the key to avoiding further financial disaster and starting economic recovery is to know when to walk away. Christopher Thomberg of Beacon Economics consulting firm said, “It’s a stealth stimulus. The quicker these people shed their debts, the faster the economy is going to heal and move forward again.”
For anyone having difficulties, it is important to know the warning signs and act on them. Studies by First American Core Logic are showing that about 25 percent of all U.S. homeowners now owe more on their mortgage than their home is worth. And in the most precarious states — Florida, Arizona, California, Michigan and Nevada — about 40 percent of homeowners are paying loans larger than their homes’ worth. Thomberg added, “These are the consumers who continue to struggle, and it gets to the point where it’s like beating a dead horse. … How far are they going to get?” If consumers are consistently having problems funding necessary bills and having to turn to payday loans or family help, then it may be time to turn things around proactively.
It’s important for consumers to avoid disaster. Andres Duque, hotel worker in Miami, was struggling to pay his mortgage on a $125,000 condo. He purchased his home in 2005, but since the recession condos in his building were selling for just $35,000.
He eventually decided to let the property go into foreclosure and said, “I was able to pay off all my credit cards.” He added, “In a way it was the best thing that happened to me because all my income is not being consumed by this freaking monster of a debt.” One thing experts are noting is that there is no longer the stigma of “home foreclosure” to deal with. Many homeowners have fallen to financial problems and are seeing foreclosure as a way to rid themselves of huge debt.
Some analysts are critical of the government
Law professor Brent T. White wrote a thesis on government action regarding the real estate industry. He said:
“I question why banks that made bad loans are getting a federal bailout but homeowners are pressured to do everything they can to keep paying those loans. The government was encouraging people to buy, telling people that it was a good investment to buy. Real estate agents pushing people to buy, banks pushing people to buy … and then when the market collapses, the homeowner alone is left holding the bag and forced to bear the burden. And so I think we need to talk about the disproportionate burden that is falling on homeowners.”
Regardless of the burden, experts are noting that cash-strapped people are seeing ridding themselves of a large mortgage as a positive move. They are becoming renters and shedding the responsibilities of homeownership. For anyone having to use payday loans or other borrowing consistently, moving to renter status may be the wisest option.