In the early 1980s the British punk band The Clash asked a question many homeowners are struggling with today:
Should I stay or should I go now?
If I go there will be trouble
And if I stay it will be double
So you gotta let me know
Should I stay or should I go?
Walking away from a home that is worth less than the mortgage debt is not simply a financial decision, it is a moral dilemma. University of Arizona associate professor of law Brent T. White argues in a paper entitled “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis” that Americans who own homes that have depreciated far below the amount owed would be better off walking away and renting. In this paper recently featured by the Wall Street Journal Online, Mr. White says homeowners are kept in these “upside-down” homes by feelings of fear, shame, and guilt that are encouraged by politicians and bankers.
No one wants to walk away from a family home, but one should consider the financial consequences of staying. White gives the example of homeowners “Sam and Chris” who purchased a home for $585K 2006. Their mortgage payment is $4,300/mo. White explains:
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[.]
Walking away from a financial obligation can be a gut-wrenching decision. If you are struggling with an upside-down home and indecision’s bugging you, speak with an experienced bankruptcy attorney. Only a licensed attorney can explain the legal consequences of walking away from a home.