My first issue of The Atlantic magazine hasn’t come yet. I also subscribed to The Atlantic Business RSS feed. The online articles are free to everyone, not just print magazine subscribers.
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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dd says
Millennials have a healthy perspective and seem to think that travel and necessary savings are more important..that is if they have a job. The importance of owning a house may fade along with the older generations.
dd says
CA is a non recourse state and I think a lot of people are asking themselves, Shouldn’t I default? and When should I default? Acquaintances that live in CA are underwater on their house that they bought in 2003. They bought another house in 2010 that they are collecting rent on and making a small profit. If they lose their jobs, they send in the keys for the first house and continue making payments on the second house. These friends and others in CA have a plan to default if circumstances change for the worse.
anie says
Late to the party here, as ever, but this is always in the back of my mind as an option, though my dad would have to somehow never find out!!! We are in a small home that we could afford by purchasing it with a 203k rehab loan~it had been stripped down to the 2×4’s and needed new plumbing, electrical and furnace. We got all that done, on time and under budget but now stuck with a 5.5% rate on our FHA loan.
Not sure if we can refi due to our FHA status and low principal paid amount (purchase in 2003) but we aren’t considering selling (at a loss) to rent, as rent here is going to be nearly 90% of what we’d pay with a 3.5-4% loan rate and without a yard/pets/any guarantee of how long we’d get to stay before moving again & with a small family tied into the only work & school that we can swing, we can’t leave our housing location up to chance~though walking away from this loan would put us into renting automatically.
Trying to sort out how/why and where to try and refi….
Sam Seattle says
I agree. Buying a home is prioritized way too high in the general public.
Harry, are you for or against strategically defaulting on one’s mortgage, if one is upside down on one’s mortgage? And why?
Harry Sit says
Against. Nobody forced you to buy the home. Nobody forced you to take out that loan. After you bought the home, its value, i.e. upside down or not, has nothing to do with whether you can afford it. Car loans go upside down quite often. By that logic people should all default on their car loans. Anything you buy on a credit card will go down in value before the bill comes (the item becomes used or consumed). By that logic people should simply default on the card. It’s absurd.