I read Why Shouldn’t People Just Default? and So When Should You Default on Your Mortgage? by Megan McArdle. Ms. McArdle is against strategically defaulting on one’s mortgage in general, but she also gave a list of acid tests for when she would be OK with a default.
The tests come in the form of six questions. Question #3 is:
3. Is the mortgage cutting into necessary savings? After I have worked on the income and expense side, can I pay the mortgage while still saving
a. 15% of my income for retirement
b. An adequate sum for college if I have kids
c. An emergency fund of at least 6 months worth of expenses
d. Any savings for special needs (say, "We think Fred will need a wheelchair ramp in five years.")
If these are the standard for whether the mortgage is affordable and it’s OK to default if the mortgage isn’t affordable, I would say 80% of the homeowners with a mortgage should stop paying because they can’t afford it. They are not saving 15% of their income for retirement, plus an adequate sum for their kids’ college fund, plus an emergency fund of at least 6 months of expenses, plus savings for special needs in five years.
I added one more question to the list in the comments. Several people liked it.
"Have I taken cash out since I bought the house? And what did I do with that cash?"
On the flip side, if items 3-a through 3-d above are the standard for whether one should buy a home, I would agree wholeheartedly. I think buying a home is prioritized way too high in the general public. If someone doesn’t have 3-a through 3-d down yet, they should focus on those as opposed to buying a home.
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