Should you walk away? Try this calculator
Online aid lets homeowners try out different scenarios to weigh financial implications of keeping or giving up their home.
In addition to dealing with moral and emotional issues, homeowners have to look closely at the financial repercussions: Is walking away from a home on which the mortgage owed exceeds the value -- a situation faced by about one-quarter of U.S. homeowners who have mortgages -- a good financial decision?
The calculator lets homeowners play “what if” with some significant variables:
- How long do you plan to stay in your house?
- What will be the rate of appreciation?
- How much would it cost you to rent?
- What does your mortgage save you in federal taxes?
We input a couple of common scenarios:
- Single-family house in Florida: Purchased for $350,000 with no money down and a 5% interest rate. Now valued at $175,000. Interest portion of mortgage payment is $1,878 a month, with property taxes at $300 per month and insurance at $200 a month. The owner could rent a similar house for $1,500 per month, and he saves $1,500 a year in federal taxes through his mortgage interest deduction. The homeowner plans to keep the home for five years, and projected annual appreciation is 4%, close to the historical national average.
Under this scenario, a common situation in Florida, California, Nevada and other areas that experienced a real spike in values during the boom, it would take the homeowner 25 years to gain any equity in the home. The homeowner could save $878 a month by walking away, or $146,122 in total.
- Single-family house in the Midwest: Purchased for $350,000 with no money down and a 5% interest rate. Now valued at $300,000. Interest portion of mortgage payment is $1,878 a month with property taxes at $200 per month and insurance at $100. The owner could rent a similar house for $1,500 per month, and he saves $1,500 a year in federal taxes through his mortgage interest deduction. The homeowner plans to keep the home for five years, with annual appreciation of 4%.
This homeowner would gain equity within 4.17 years, and while he could save $678 a month by renting, walking away from his mortgage would cost him $8,360 over the five years.
The calculator doesn’t take into account the cost of maintaining the home, nor does it account for any financial hardship the homeowner would suffer because of bad credit, such as higher loan rates, credit card rates and maybe even being turned down for a job or apartment.
A commenter to The Times also cautioned that the formula for calculating the tax benefits from the mortgage interest deduction was incorrect.
The calculator doesn’t tell you whether you can afford to make the payments, a significant factor. And while we can all make a calculated guess at home appreciation, 4% is very optimistic for the next few years.
But the calculator is another tool to use in weighing whether to keep paying on a mortgage when you owe significantly more than the house is worth.
And what is your house worth? A calculator at the Federal Housing Finance Agency will give you an estimate, based on what you paid for the house and when you bought it, using the average rate of appreciation (or depreciation) in your area since then. Even that is only a ballpark estimate. The best way to find out what your home would sell for is to get comparative market analyses from several real estate agents who know your neighborhood.
Other issues to consider that aren’t part of the calculator are whether the lender will come after you for the unpaid amount of your mortgage and the tax implications of forgiven debt.
“Walking away” doesn’t necessarily mean literally walking away and abandoning your house, probably the worst method of disposing of a home that you no longer can afford. Rather than wait for foreclosure, you can negotiate a short sale or a deed in lieu of foreclosure with your lender.
Where do you draw the line?
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