To Default or Not to Default?

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One of the leading proponents of strategic default—a.k.a. walking away, even when you have the money to keep up with mortgage payments—says there are three situations in which it’s actually a good idea to keep paying the mortgage.

University of Arizona law professor Brent White, whose new book is entitled Underwater Home: What Should You Do if You Owe More on Your Home than It’s Worth?, says that defaulting can be the smartest financial decision a homeowner can make, and that ethical concerns should not factor into the decision. In other words, this is strictly business.

Even though White says that walking away is often the most sensible option given today’s housing market, while speaking with the NY Times’ Bucks blog recently he laid out three scenarios in which strategically defaulting is probably a bad idea. The situations are:

1. You’re less than 10 percent underwater (you owe $100,000, for example, and your house is worth $95,000); or

2. Your monthly cost of owning is less, or only slightly more, than the cost of renting. In other words, the net cost of owning your home (your monthly mortgage payment plus all other ownership costs minus any tax breaks you get from owning) is less, or only slightly more, than the cost of renting your home or an equivalent home (Professor White details how to make such calculations in the book); and

3. You don’t need to move.

Note that “You made a promise to the mortgage lender and you’ll feel bad if you broke it” is not one of the situations.

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