I know I just wrote a response to a Realtor.com “Hot Topic” – about what goes in to your credit score and how it affects you as a home buyer. But their most recent hot topic was too interesting to pass up. The question: “Should you continue to pay for a home where you owe more than it’s worth?”
I’ve blogged before about strategic defaults – where a homeowner, who can afford his mortgage, intentionally stops paying and either lets the bank foreclose or tries to negotiate a short sale. The posts generated a lot of attention – a firestorm, really. Some people thought that strategically defaulting could be a sound business decision for some people. Others found it morally reprehensible.
Zillow.com estimates that 22% of all homeowners in the U.S. have negative equity. In the Phoenix Metro area, 80% of homeowners with nonprime mortgages do. The average amount of negative equity (among subprime and Alt-A borrowers) is $73,314.
Does it makes sense for those homeowners to continue to pay on their homes, or should they walk away? I must sound like a broken record, but I have to say that I’m not advocating for strategic defaults; nor am I condemning them. That said, there are a number of factors to consider when thinking about “walking away”:
1) How “upside down” are you? One of my newest clients is trying to negotiate a short sale for her home, even though she can still afford her mortgage. She lives outside of Phoenix where the bubble and bust were particularly dramatic. She owes almost twice what her home is worth. If we assume that the market will return to a normal rate of appreciation in the next few years, it would take her more than a decade to get out of the hole.
Contrast her situation to one of a North Scottsdale homeowner who owes just 5% more than his home is worth. Again, assuming that the market will return to a normal rate of appreciation in the next few years, it shouldn’t take this homeowner more than a year or two to get right-side up again.
2) Do you have to move? Even if you owe more on your home than its current market value, that’s all on paper – unless you need to sell today. My new client, in addition to being way upside down, needs to move because her husband has a new job in Desert Ridge (which means a three hour commute every day right now).
If you don’t have to move – and you likely won’t have to move in the near future, staying put is probably the best thing to do.
3) Are you willing to accept the consequences of walking away? Even if you are able to negotiate a short sale with the bank, you’ll feel the ramifications of your choice for several years. First, if you’ve missed your mortgage payment in the run-up to the short sale, those late payment dings will hurt your credit score for 2 years. If the bank forecloses, that black mark will stay on your credit for 7 years, and will probably prevent you from buying another home for at least 4 years.
Clearly, answering the question, “Should you continue to pay for a home where you owe more than it’s worth?” is tough – and it should be. No matter your circumstances, a mortgage is a contract – a promise you made to the lender that, in exchange for the money to buy a home, you would repay that money as agreed. Breaking that promise, while it may be the right decision for some people in some circumstances, shouldn’t be taken lightly.
What do you think? Are there circumstances in which walking away is the right decision? Click on the “Comments” link below and join the discussion!
Comments(0)