Yesterday I asked the question, Bob or Jim?
Make sure you read that post so you can be up to speed on where we are. I’ll give you a short synopsis. So Bob and Jim are neighbors that moved in together in 1997. They both paid the same amount for their house($250,000) and both had 10% down so ended up with the same mortgage($225,000, 30-year fixed rate at 8%). The difference is that Bob wants to pay down his house and Jim wants to build his savings. They each have an extra $350 per month to do something with. Jim starts saving all of it.
So fast forward to 2008. To continue where we left off Bob and Jim were both victims of the economy. Both out of work for an extended period of time. Things were getting worse. Tightening budgets and they couldn’t pay their mortgages. If you want to make it even worse you can say they are both in a car accident while driving back from the unemployment office. Just as their unemployment ran out, they where broadsided at a light. Back injuries and their laid up for a long while. Neither had disability because they lost their insurance when they lost their job. (Most people don’t realize a proper individual disability policy will pay out even if you lose your job)
So what are they to do? Bob thinks how he is good friends with Paul down at the bank who he got his original mortgage with and his refinance. He’s built up all this equity. He can tap that in the meantime and it will help him until the economy recovers or his back gets better. So he goes to see Paul. Paul can’t help though. The bank has tightened lending and Bob had no income. He can’t prove to the bank that he can pay that loan back. The bank says no. All Bob’s money is in the house.
Jim, however, had been saving money outside of his house. Yes he owed more on his mortgage but he had built up some money that he could access. It turns out that he had about $100,500 saved in his side account. He could access this money until he could get back on his feet. Or maybe the bank would at least talk with him to work something out since he had some assets to offset his liabilities.
In fact, Jim wasn’t too bad off. He had a mortgage for $193,000 but a savings of $100,500 so his balance sheet would show him $92,500 in debt. If your remember Bob still owed $80,000 on his mortgage with no savings. Who would you rather be? Which is in a better situation?
How about scenario B…Jim takes out an extra $100,000 when he does his refi in 2003. The he would have a mortgage of $284,000 but savings of about $200,000. Does this change your decision in the first part? Why does it change things?
To Be Continued…
I bet you can’t wait for Bob or Jim? The Final Chapter
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