…and no I don’t mean the kind where the government decides to throw a little of that fat bailout cash at you. No… I mean the kind that you really should be considering for yourself if you’re seriously underwater on your mortgage.
This report from the University of Arizona College of Law does a good job of summarizing how American’s who owe more on their homes than their homes are worth should really consider just walking away—that the financial well-being of one’s family may depend on it. Consider this example (emphasis added):
Unfortunately for Sam and Chris, the housing market began to collapse in 2007. Though they still owe about $560,000 on their home, it is now only worth $187,000. A similar house around the corner from Sam and Chris recently listed for $179,000, which, with a modest 5% down, would translate to a total monthly payment of less than $1200 per month – as compared to the $4300 that they currently pay. They could rent a similar house in the neighborhood for about $1000.
Assuming they intend to stay in their home ten years, Sam and Chris would save approximately $340,000 by walking away, including a monthly savings of at least $1700 on rent verses mortgage payments, even after factoring in the mortgage interest tax reduction. The financial gain for Sam and Chris from walking away would be even more substantial if they took their monthly savings and put it into an investment account. If they stay in their home on the other hand, it will take Sam and Chris over 60 years just to recover their equity – assuming, of course, that they live that long, the market in Salinas has indeed hit bottom, and their home appreciates at the historical appreciation rate of 3.5%.
Underwater and Not Walking Away, Page 10
The report goes on to discuss the many factors that cause individual homeowners to decide not to take a step that so many companies seem willing to take, even willing to build their business models around—In other words, government indemnification against losses.
It’s a sad fact that so many Americans are in this state, even more sad that they seem to be unable to do the one thing that makes imminent financial sense.