Jumbo Loan Doesn't Change Liability

Marie and her husband bought a large home in Atlanta with a jumbo loan, and their mortgage is 25% of their income. They don't plan to stay in the home long term. Dave thinks they need to pay this house off anyway.

QUESTION: Marie in Atlanta and her husband are working through the Baby Steps. They bought a large home in Atlanta with a jumbo loan, and their mortgage is 25% of their income. However, all of their equity is gone, and they still owe $675,000. They don’t plan to stay in the home long term. Dave thinks they need to pay this house off anyway.

ANSWER: Your mortgage isn’t bad if you’re making $300,000. Get it paid off. I’d say your mortgage is terribly long-term, wouldn’t you? You’ve got to pay the mortgage whether you move or stay. Pay your $120,000 in savings toward the house. Let’s get this house paid off.

Guess what? When you sell a house, at the closing, they give you a check equal to your equity. You’re not losing this money. A housing market drop doesn’t matter. You’ve got to pay this mortgage whether the house is worth $100,000 or $700,000. They’re not going to let you out. You make $300,000. They’re going to sue your butt off. You’re not going to get out of the mortgage. Pretend like it’s $600,000 unsecured and your house is paid for. That’s what it is. It’s just not fully secured because of that. Do you really think over the next five years that Atlanta real estate is going to continue to slide?

It doesn’t matter what your house is worth. In a mortgage, there are two elements to it. There’s the collateral, which is the house, but there’s also the personal liability. You’re personally liable on the loan whether the house is worth that or not. That defeats this theory of, “Oh, it’s underwater, so I don’t need to pay it off.” They’re going to come after your tail anyway. Knock this baby out. It does not change your Baby Steps. You’re still in line to get your house paid off. It’s just hopefully you’re going to stay there long enough to see some of your value come back. All of this money is not gone. The loan isn’t what caused you to lose money. What caused you to lose money is you bought a house that went down in value. It wasn’t the loan. Separate the two.

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