Want to know if you should walk away from your home, at least from a purely financial standpoint?
The following example should help.
Joe and Jane Homeowner buy a house in June 2006 — the peak of the market — for $240,000, the average home price in the Tampa Bay area at that time. They put 5 percent down and get a 30-year fixed mortgage at 6.75 percent, the going rate in summer 2006.
They pay annual property taxes of $3,500 and $2,500 for property insurance. Their monthly payment is $1,976.
Unfortunately, the market plunges, and now that $240,000 home is only worth $137,500, the current average home price in the Tampa Bay area. They've made 41 monthly payments, but still owe about $219,000 in principal. That puts them $81,500 underwater.
IF THEY WALK AWAY: They can rent the equivalent home for about $1,100, the current average rent for a three-bedroom home in the bay area. They save almost $80,000, assuming they would have stayed in their house for eight years. They would earn even more if they put that money in an investment account for those eight years.
There is a risk: Florida law allows lenders five years to pursue a deficiency judgment. The bank could ask a judge to force Mr. and Mrs. Homeowner to pay the difference between the loan amount and the foreclosure sale price. But the flood of foreclosures has made such suits against homeowners rare. They may want to talk with an attorney.
Their credit rating will also take a serious hit, though just how serious would depend on whether this was an isolated credit blemish or one of a series of problems. And how quickly they could re-establish a decent credit rating is open to debate. It could be as short as two years for the financially astute.
On the upside, changes to the law keep most homeowners who walk away from owing taxes on the essentially forgiven debt.
IF THEY STAY: Assuming 4 percent annual appreciation, close to the historical average, it will take Mr. and Mrs. Homeowner almost 15 years to recoup their lost equity. They will also lose about $630 a month — or $113,400 over the 15 years — by paying the $1,976 mortgage, instead of the much lower rent for an equivalent house. And that's after factoring in the mortgage interest tax deduction.
Yes, rents will likely rise over the years, cutting into the monthly savings, and the cost of moving would also need to be factored in. On the other hand, as renters Mr. and Mrs. Homeowner wouldn't have to shell out thousands of dollars for the maintenance that comes with owning a home.
THE FINANCIAL BOTTOM LINE: Mr. and Mrs. Homeowner would have to decide if saving more than $100,000 was worth the hit to their credit rating and the slight risk of a deficiency judgement. And of course, as a financial calculation, this doesn't attempt to account for the moral or social costs of walking away.
Want to try the math for your own home? Check out www.youwalkaway.com.
Compiled by Graham Brink, Times Business Editor