February 19th, 2010
The Case for Walking Away From Your Mortgage
“Strategically defaulting” and walking away from your home is becoming less taboo and more mainstream as the 2009 housing collapse left 10.7 million families underwater on their mortgages– meaning they owe more on their mortgages than their homes are worth. With an additional 6.7 million estimated homes expected to be underwater by the end of 2010, homeowners face a very difficult question– to pay or to walk away.
When It Makes Financial Sense
Let’s say you took out a mortgage in 2002 for a $600,000 home that is now worth only $300,000. Depending on how home values fluctuate, it could be decades before your home returns to the sales price you started paying on years ago. You can sit back, enjoy the home, and pay off your mortgage as planned, but you may be left with a home valued at less than what you paid. On the other hand, you could walk away from your mortgage and rent a similar home for less than your current monthly mortgage payments. This could save you thousands of dollars a year, and hundreds of thousands over the life of your mortgage.
For help on calculating how much you can save, check out “Does It Make Financial Sense To Walk Away & Rent?” at YouWalkAway.com, and use Zillow.com to estimate the value of your house.
As you calculate whether it’s worth the savings to walk away, don’t forget that defaulting on your mortgage comes with foreclosure costs, not to mention the long-lasting impact on your credit score. Your credit will take a substantial hit of up to 160 damage points due to foreclosure, but for many it may be a small cost to pay in comparison.
Not A “Moral Obligation”
Several news sources, like the Business Insider, contend that while it is generally frowned upon for homeowners to choose to default even when they can afford to pay, it is not a moral obligation to make good on your mortgage. Are borrowers obligated to repay loans even though it is not in their financial interest to do so, while lenders are free to maximize profits by whatever means?
Ethical argument aside, borrower and lender enter into a business contract in which the lender evaluated the risk of the transaction—including the possibility of the borrower defaulting—and decided to lend anyway. The contract explicitly states that if the borrower stops paying, the lender takes the house and borrower lose equity and credit score will be hurt. The terms of walking away are quite clear and are written into the contract. You have no moral obligation to pay your mortgage because it is a business agreement both parties entered into willingly and fully aware of the possibilities and consequences.
There is one caveat: walking away from your home may depress your neighborhood’s property values.
To Walk Or Not To Walk
Many Americans dutifully pay their mortgages, despite the financial incentives to walk away. This blog is not recommending homeowners walk away from their homes, but aims to pose a different perspective of the options homeowners have. Most of all, walking away from your home should be a calculated, well-thought out decision because of the substantial impact it has on your credit, finances, and living situation. If you’re going to take the plunge in order to get out of being underwater, check out How To Walk Away From Your Mortgage to navigate a tough financial decision as well as possible.
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