WALKING AWAY IS A-OK
Calculating the amount of time it would take for the value of your home to return to the amount you currently owe often raises questions of your desire to stay. There are two major decisions you will face when deciding to walk away (strategically default) on your mortgage; the financial consequences that affect your family, and the ethical moral stigma against walking away.
FINANCIAL CONSEQUENCES
We have created a Breakeven Calculator to help you determine the amount of time it will take to return to a point where your house is worth what you owe, and how long it will take to return to an amount to recover your equity (down payment you made when you bought the house). In Arizona, over the last 30 years homes have averaged an increase of 3%/year. Although the market may continue to be going down in your area, for purposes of our calculation let’s assume we have hit bottom and it will start to increase at the 3%/year.
If your home is 30% underwater it will take approximately 12 years to return to a value that you could sell your home on the open market for the amount you currently owe. If your home is 40% underwater, 17 years, 50% underwater 23 years to recover the loss. To recover the 20% down you may have put down when you purchased the property, if your home is 30% underwater, it will take 20 years to recover, 40% underwater will take 25 years, and 50% underwater will take 30 years to recover.
The first question is, do you plan on staying in your home this long? If the answer is yes than you should probably stay. If no, then you are basically renting at a higher amount than you could rent the same house in your neighborhood.
ETHICAL CONSEQUENCES
It used to be that the three words to stir up moral outrage were “Just walk away.” The social stigma around walking away from your mortgage has changed as homeowners become educated on the contracts they signed when taking on their mortgage. There are two types of mortgages in Arizona.
Recourse Mortgages – A borrower is personally guaranteed to pay the debt. Which means if the borrower chooses not to, or can’t fulfill the obligation of the monthly payments, the Lender can not only take the house but can come after the borrower for the difference of the loss through wage garnishments and judgments.
Non-Recourse Mortgages – A borrower is not personally guaranteed to pay the debt. This means that the only recourse the Lender has is to take the home either through foreclosure or receive money through a Short Sale. The Lender’s loss incurred is not warranted to come after the borrower under this type of contract.
THE MAJORITY OF RESIDENTIAL LOANS IN ARIZONA ON NON-RECOURSE.
Or in other words when you signed your mortgage to borrow the money, all you agreed to was that if I can’t or choose not to pay the monthly mortgage you can have the house through Foreclosure or receive money through a Short Sale. The Lender understood their risk when they lent you the money.
The following article written by a Law Professor at the University of Arizona describes this moral dilemma.
