Sunday, December 28, 2008

Borrowing in Boonton

The illusion of wealth became more than an illusion during the bubble. Every year it seemed one's property increased by 10%. This increase in property value was easily accessible through a HELOC that one could use to keep up with the Joneses - or in some cases pass them. The middle class was suddenly purchasing the same items as the rich and famous. Everyone could afford a BMW, Tiffany jewelry, and a coach bag over their shoulder to pick up groceries at Shoprite. Things did not make any sense - but it seemed they did not have to.

All one needed to was to refi and become rich again. Now those who did have no equity left. The portion that was not spent has disappeared with the falling property values. The lucky ones are not underwater, the unlucky ones have nothing left to show. Sometimes it is hard to tell which is which. In today's example from Boonton, the financial future of the property owner will probably depend on whether they were in HELOC heaven (or at least just a bit) or just took out the HELOC for a safety net. If they indulged they will be bringing a check to closing - if they abstained (and how many really did???) they will walk away with a little more than their original investment. Well, lets take a look -

Here is the property -

The front of the house.

The living room with a stone fireplace.

The outdated kitchen.

Here is the property info -

  • Status: Active
  • County: Morris
  • Year Built: 1938
  • 5 total bedroom(s)
  • 3 total bath(s)
  • 3 total full bath(s)
  • 9 total rooms
  • Style: Tudor
  • Master bedroom
  • Living room
  • Dining room
  • Family room
  • Kitchen
  • Basement
  • Laundry room
  • Bathroom(s) on main floor
  • Bedroom(s) on main floor
  • Master bedroom is 22x21,Includes: Full Bath
  • Living room is 21x10
  • Dining room is 12x11,Formal Dining Room
  • Family room is 23x19
  • Kitchen is 11x07
  • Basement is Unfinished
  • Hardwood floors
  • Fireplace(s)
  • Fireplace features: Family Room, Insert
  • Parking space(s): 14
  • 2 car garage
  • Parking features: Built-In Garage, On Site
  • Heating features: 4 Units, Baseboard - Hotwater, Multi-Zone,Gas Water Heater,Gas-Natural
  • Central air conditioning
  • Cooling features: 2 Units, Ceiling Fan
  • Inclusions: Home Warranty
  • Exterior construction: Composition Shingle
  • Roofing: Asphalt Shingle
  • Community tennis court(s)
  • Pets allowed
  • Waterfront property
  • Lot features: Lake Front
  • Approximately 0.27 acre(s)

Here are the financials -

  • The property was purchased in June 2003 for $570,000.
  • The first mortgage originated with the home purchase in June 2003 for $456,000 with Countrywide Financial.
  • A second mortgage was signed the same day for $57,000 with Countrywide Financial.
  • A HELOC was opened in August 2004 for $75,000 with Provident Bank.
  • The property is currently listed with a realtor for $619,000.
The first things we can tell is that the owner put a 10% downpayment - which was $57,000. That was a huge downpayment during the bubble and still quite respectable.

Now the big question is how much of the HELOC was utilized. If the sellers were in HELOC heaven (or just visited entirely the one time) they will stand to lose $6,140 if the house sells for full asking price and the realtor receives the standard commission. If the HELOC was only opened as an emergency (not the vacation, new car, new clothes, coach purse type of emergencies that were common during the bubble) the homeowners will walk away with $68,860. That is just $11,860 more than the original downpayment. Not great but at least not a loss.

So the economic future the homeowner now depends on how much of that HELOC was touched. And boy were HELOCs tempting during the bubble - how else could we all suddenly feel rich.

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