May 13, 2008

How to Ruin Your Finances and Risk Losing Your Home

Sunday’s L.A. Times “Money Makeover” profiled a 45-year-old North Hollywood woman, Alicia Cardenas, whose high mortgage payments are eating up too much of her monthly income. Her story will undoubtedly resonate with the millions of Americans who, when presented with money, must spend it.

Anyone who agrees to the makeover has to lay bare their finances in exchange for free advice from a professional financial planner. You’ve got to admire Ms. Cardenas, who makes $80,000 a year as a human-resources manager, for having the courage to do so, because the picture is not a flattering one. 

She and her then-husband bought the two-bedroom-plus-den house in the 1990s for just $123,000. 

But the couple burdened themselves with more mortgage debt by using their house like a piggy bank. Tapping the rising equity, they refinanced to pay off credit card debts, take vacations and remodel. Two years after buying the house for $123,000, they refinanced for $250,000. With the money, they paid off $30,000 in credit card debt, $20,000 in car loans and took a vacation to Guadalajara. Three years later, they took out a $50,000 home equity line of credit, adding two bedrooms and a bath.

When she and her husband separated, she decided to try to hold on to the house, but fell behind on her payments.  She also needed $90,000 to settle the divorce, but instead of selling the house, she refinanced — at a high interest rate, because of her poor credit.

Next month, the financial pressure will mount when the adjustable rate on Cardenas’ $410,000 mortgage increases, raising her monthly payment by $462 to $3,291.

You might think that somewhere along the way, a light bulb would have gone off in Ms. Cardenas’ head, but apparently not:

Recently, when her 19-year-old daughter’s car broke down, she borrowed $6,500 to buy her a new one. Cardenas said her daughter needs the car to pick up her 11-year-old sister and her 9-year-old brother from school. In addition, she used part of a $5,000 tax refund to pay off some debts, but she also splurged on a trip to New York with a girlfriend.

Ms. Cardenas is working with the Neighborhood Assistance Corp. of America (NACA) to restructure her loan into a 30-year fixed, which would bring her payment down to about $2,200 per month.  Otherwise, she’s looking at a short sale or foreclosure. 

But even if NACA comes through, will she just get herself into the same trouble all over again?  She’d better get the message soon: She has no savings of any kind — no emergency fund, no retirement account.

If only she’d been content with her little $123,000 house and even smaller mortgage, think how much better off she’d be today.

Recent Redfin posts:
Foreclosure Creep Comes to Prime Valley Housing
Who’s Really Walking Away?

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