This NY Times article makes a case that people who owe significantly more on their mortgage than their home is worth might be better off to walk away, even if they can afford the payments. The Wall Street Journal ran a similar article a few weeks ago.
The idea is that many people who bought homes with little or no down payment during the market’s peak could walk away and rent a similar home for a fraction of the price. The additional savings could significantly increase their financial well-being by sacrificing their credit.
John Courson, the president of the Mortgage Bankers Association disagrees and questions what kind of “message” homeowners who voluntarily walk away will send to family, kids, and friends. He correctly cites that foreclosures futher depress surrounding home prices.
I’ll add a bookmark to this page along with my daily dose of Mankiw & Krugman.
I just don’t understand the logic behind this decision, long term. Even in the extreme cases where something becomes worth half as much, like a $200,000 mortgage on a home now appraised for $100,000.
You could either:
A) Make a short-term profit by pocketing difference between rent vs. mortgage…but ruin credit and be destined as a renter for years and in the process not build any equity through a home
or
B) Understand that in the cycle of a 30 year mortgage, this is probably the bottom, and it will go up (just through 30 years of inflation it will have to go up), but maybe not neccessarilty to the full $200,000. You may lose some money, but in 30 years you’ll still have maybe $150,000 to $200,000 of equity at your disposal.
It’s not like their mortgage payment went up all of a sudden. The temporary value of their house went DOWN, their payment didn’t go UP (unless we’re talking varitable interest rate mortgages).
So why panic and ruin your credit. It’s hard getting that back, and in the meantime you’re not eligible to buy anything of worth, like a car, and may not even be able to get a better job with this new practice of having credit checks performed by employers.
Whatcha think JWK.
Damn proud,
bp