Lately we’re inundated with news about people losing money on their homes and the increasing rate of underwater mortgages.
As a Short Sale Specialist, I speak with many people who owe more on their mortgage than their homes are actually worth. As their homes continue to lose value and they are continuously rejected the option of renegotiating their mortgage, inevitably, these people start weighing the option of just walking away: giving up on paying the inflated mortgage and leaving the house to foreclosure.
So what should you do?
There are two very distinct attitudes about walking away from your mortgage. First, there are people who think it unethical and shameful for a person to knowingly default when they can afford to pay their mortgage. And second, there are people who think walking away is nothing compared to the wrongs committed by the banks and Wall Street firms who put them in the situation in the first place.
At what point does it make financial sense to default on your mortgage?
If you are a homeowners who is more than 25% underwater, meaning your negative equity is up to $100,000, when do you walk away? Or, do you hunker down and wait for the financial storm to end in 5 to 10 years?
Not sure what I mean by negative equity?
Just take a look at these numbers:
Let’s assume you owe $315,000 on a $375,000 home that’s now worth $225,000. Your monthly payment is $2,600, but more than likely you can find a fair sized space to rent for under $1,600 a month.
Your first option?
You walk away from your mortgage debt. At the end of 7 years – when the foreclosure is gone from your credit report – you’ll have spent $134,000, but saved $84,000 in payments by living in that rental home.
Your second option?
You decide to stay in your home. Assuming that housing prices in California start appreciating again at their traditional 3% rate, after 7 years your home will be worth about $275,000, and you’ll have paid down your mortgage to about $260,000. In summary, you will pay $218,400 over seven years to gain $15,000 in home equity.
And what happens to your credit score you’d end up with by walking away?
If you bought during the peak in some of the hardest-hit areas of California – which aren’t predicted to recover until 2030, or even 2040 – then making a house payment is equivalent to renting anyway, since you’re not really building any home equity.
A foreclosure, whether strategic or not, stays on your credit history for seven years, but its impact on your credit score can decline over time. It’s best to know the impact before making any decisions about defaulting on your home loan.
Think you are alone? Just watch this video:
My fear is that many homeowners seem to overestimate the speed with which home prices will bounce back, which prevents them from taking any action. The biggest deterrent of walking away from borrower debt is the fear, shame and failure associated with defaulting on your mortgage debt.
There are mortgage default/foreclosure alternatives you can explore before you make your decision.
If you’re not sure where to start or what to do about your home’s lost value and the foreclosure process, give me a call. I’ll help you go over your options and get you started on the path that’s right for you.
Sincerely,
Mark Shandrow
Real Estate Broker
office 562-364-9505 ext 100
mark@shandrowgroup.com
Shandrow Group
3970 Atlantic Ave., 210
Long Beach, CAÂ 90807
follow my story at http://markshandrow.com
