What Would You Do? #4

Jan 30, 2013 by

dice with question marksEach What Would You Do? article outlines a scenario with a dilemma and choice to be made by a person I’ve made up, either Dave or Diane (any resemblance to you or me is purely coincidental!). Most of the time, money won’t be the only factor involved in the choice, but money will play a meaningful part in Dave’s or Diane’s options. Also, most of the time, there won’t be a “right” answer (this is NOT a test!). I’m hoping to get at what should Dave or Diane consider in making the choice? What’s a good way to go about making the choice? Of course the best way for you to explain your ideas may be to outline what you would do in the same scenario and, most importantly, why.

Diane Gets a Job Great Offer

Diane just got some excellent and long sought news: An offer of a new position with a big pay increase. The job is exactly the sort that Diane had been seeking for some time and is with a first class company with lots of opportunity for challenge and advancement. There’s just one catch: The new job is in Denver, and Diane lives in Phoenix.

Burned by the 2008 Financial Meltdown Aftermath

Let’s back up a bit. Like millions of Americans, Diane took a beating when U.S. financial markets crashed in 2008 and the housing market collapsed. Her employer laid off 30% of its workforce, including Diane. The house in Phoenix she and her husband bought in 2006 lost half its value—about $150,000. While Diane looked for work, the family borrowed money—$15,000 in the end—from Diane’s sister to stay afloat. Diane eventually found work, but at a bit more than half her previous salary. Still, with cutbacks in their lifestyle, Diane and her husband were able to make ends meet, barely.

Underwater Mortgage

With the drop in the value of their home, Diane and her husband find themselves $100,000 underwater: Their outstanding mortgage balance is $250,000 and their home’s estimated value is $150,000. The hardships of Diane’s unemployment and then underemployment drained their savings. Any extra cash Diane can squeeze out of the household budget goes toward repaying the loan from Diane’s sister. Diane and her husband have been saving nothing for their retirement and nothing for their two young kids’ post-secondary education since the meltdown.

How to Accept the Dream Job Offer?

The position just offered to Diane comes with a salary 50% higher than even her pre-meltdown pay. Diane’s husband works in technology and has contacts in Denver who say he should be able to find solid work quickly. Diane and her husband figure that, with their likely combined earnings in Denver, they could repay Diane’s sister and rebuild an emergency fund within 18 months of relocating. But that’s the challenge: How does one relocate from a house with an underwater mortgage?

Getting Out From Under an Underwater Mortgage

Diane sees no way the move could be made unless they sell their house in Phoenix. But to pay off the mortgage, Diane needs another $100,000 in cash to add to the estimated $150,000 proceeds from the house sale.

Diane believes her house could be rented for about $850 per month (after a property manager takes its cut). The mortgage payment is about $1400 per month. And of course she’d still be responsible for property taxes, insurance, and maintenance. She and her husband have no desire to be landlords.

What Would You Do?

Diane and her husband have a tremendous opportunity to get back on track and possibly change their—and their kids’—lives dramatically for the better. But their deeply underwater mortgage stands in the way. They’re especially frustrated, like many of their fellow Americans, because they feel they did nothing wrong, yet find themselves trapped—likely for many years—by a mortgage they can’t pay off.

What options does Diane have? What would you do?

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