When should I walk away from my mortgage?
The value of debt is that it allows you to profit from the return of equity beyond the amount of actual net equity you own.  Of course, this only works if the cost of borrowing is less than your return on equity.  Market timing matters a great deal but isn't accounted for in this view.  For my answer I would like to hand-wave away market timing considerations.  One plausible justification is that you could default on your current home and then immediately go buy one of equal value.  If you buy a new home of a lesser value (due to lack of funds) and then prices appreciate, then you missed some opportunity cost but probably not $100k worth of it. Moving on, here are some helpful assumptions I'll make. I'll ignore performance of your portfolio after retirement and only seek to optimize F, which will be your net worth upon retirement.  In either case, your current net worth is earning the R2 rate.  We can convert this for both your current net worth and future savings using conversion formulas. Present to future value F = P (1+R2)^x Annual to future value F = S ( (1+R2)^x - 1 ) / R2 Adding these together is sufficient to obtain F in the case that you have no borrowing power.  The case where you do not default and maintain your credit score is different due to an initial $100k penalty and the amortized value of borrowing power.  In a completely theoretical sense, you get an effective (R2-R1) yield on all borrowed money.  The future value will be the following: F = A1 (1+R2-R1)^x One step is missing, however, which is to convert this value (the value of having a good credit score) into present value to compare to value of your defaulting. P of borrowing power = F / (1+R2)^x = A1 { (1+R2-R1)/(1+R2) }^x Now, let's put some specific values in.  Say that you can borrow $300k with your good credit history and this applies for the next 25 years, after which you retire.  The borrowing rate is 7% and the time-value of money to you is 10%.  I would then calculate: P of borrowing power = $58 k < $100 k This indicates that it would be more economical to default.  Of course, some people might point out that it will be removed from your record after 7 years.  If you plug 7 years instead of 25 years into the equation, almost no assumptions about rates will lead to the option of keeping your house being preferable. So in a nutshell, the value of your credit is probably less than $100k in a purely mathematical sense.  But there are other factors too.  If you don't have that borrowing ability maybe you wouldn't be able to borrow money to start the business of your dreams.  If you are a rock star entrepreneur, then time-value of money to you could be 1,000% yield, sure, then maybe you could make the above numbers work (to favor keeping the house).  I've also neglected ethics.  As other people point out, it would be like stealing from the bank. "I'm in a similar situation, but I live in a state that doesn't allow mortgagees to ""walk away"" without recourse. I would consider a short sale or otherwise abandoning the property if: At the end of the day, real estate is an investment, and you don't realize gains or losses until you close the position. The ""ra, ra"" crowd that thought that real estate was going to boom forever in 2006 was just as wrong as the ""bad news bears"" crowd that thinks that real estate will never recover either.  Investments rise and fall. Many people who bought houses in the 1980's boom (recall the S&L crisis) were underwater for years until prices started rising in the mid-90's. You haven't lost money until you realize that loss." "How much is rent in your area? You should compare a rental payment versus your mortgage payment now, bearing in mind the opportunity cost of the difference. Let's say that a rental unit in your area that has the same safety & convenience as your house costs $1600 per month to rent, and your mortgage is $2400. By staying in the house, you are losing that $800 month as well as interest earned on banking that money (however, right now, interest rates are negligible). Factor in total cost of ownership too, meaning extra utilities for one or the other (sometimes houses are cheaper, sometime not), property insurance and taxes for the house (if they aren't already in escrow through your mortgage) and generic house repair stuff.  If the savings for a rental are worth more than a couple hundred a month, then I suggest you consider bailing. Start multiplying $500-1000 per month out over a year or two and decide if that extra cash is better for you than crappy credit. Also, this is not the most ethical thing, but I do know of one couple who stopped paying their mortgage for several months, knowing they were going to give the house back at the end. They took what they would have spent in mortgage payments during that time into a savings account, and will have more than enough cash to float for the few years that their credit is lowered by the default. Also something to consider is that we are in a time of ridiculous numbers of people defaulting. As such, a poor credit score might start to be more common among people with decent incomes, to the point where a ""poor"" score in 5 years is worth about the same as an ""average"" score today. I wouldn't count on that, but it might soften the blow of your bad credit if you default." "Interestingly enough, ""strategic default"" seems to be more common than one might think in California and there is actually a lot of information available on it, to include a calculator that breaks down the numbers for you (although affiliated with a law office). Speaking from a purely financial standpoint, walking away only makes sense if it puts you in a better financial position than you were before while you had the mortgage. If you look at the downsides of walking away: The issues with the credit rating are will known but you need to take into account any open lines of credit you currently have as well as any need you might have to open a line of credit in the future. If you currently have credit cards, will the rates go up after the hit? On the housing side of things, you mortgage payment is currently a known quantity that will not change for the duration of the mortgage unless you do something to change it. However, it is fairly rare for rents to not change between years and if you want an apartment or house similar to what you currently have, you might find that the rent will fluctuate quite a bit between years and in the long run the rent might run higher than your current mortgage payment. Likewise, in the shorter term, if the landlord runs a credit check they might adjust what the rent is (or deny you the apartment) on the basis of the black mark on your history for reasons that other have mentioned. Another item to take into account is if you need to get a job in the future. Depending upon what you do for a living this might be a non-issue; however, if you are in a position of trust, walking away from a mortgage payment will reflect negatively upon your character unless you have a very good reason for it. This can lead to a loss of employment opportunities. Next, if you walk away from the mortgage you are walking away from the current value of the home and any future value that the home might have. If you like where you are living and aren't planning on moving to another part of the country, you are gambling that the market will not recover or that you would reach parity with what you owe by the time you need to sell the house. If you do plan on staying where you are and the house is in good repair, then in the long run you might be giving up quite a bit of money by walking away. These are a lot of factors to take into account though so its really hard to say one way or another if a strategic default is a good idea. In the long run you might come out ahead but knowing when that date is can be difficult to calculate. Likewise, in the long run it might adversely affect you and you might come to regret the decision.  If the payments themselves are a bit too high, perhaps you can refinance or negotiate with the bank for a lower payment? If you get a better rate but keep your monthly payments the same then you might reach parity with the mortgage much faster which would also be to your advantage." "It's a decision that only you can make. What are the chances that you'll want to take another loan (any loan - car, credit card, installment plan for new fridge, whatever else)? What are the chances that with the bad credit you'll find it hard to rent a place (and in Cali it's hard to rent a place right now, believe me, I bought a place just to save on the rent)? What are the chances that the prices will bounce and your ""on-paper"" loss will be recovered by the time you actually need/want to sell the house? You have to check all these and make a wise decision considering all the pros and cons in your personal case." Dan - there are other choices. What rate do you have on this mortgage? And what is the value of the home? With a bit of patience and effort, you may be able to lower your rate and save some portion of that $100k you think you can grab.  There is no factual answer here. The negative will show for 7 years, and only you can determine whether that's worth it. If in that time the value comes back you may very well be in a worse position, looking to buy a new home that's now well above where it is today. It's possible the current prices are overshooting on the downside, if unemployment drops and consumer confidence returns, you may be back to break-even sooner than you think. As an aside, I find it curious that the Trumps of this world can manipulate the system, creating multiple entities, filing for bankruptcy, yet protecting his own assets, and his wealth is applauded. Yet, asking the question here so many attack you, verbally. The Donald has saved himself billions through his dealings, I don't judge you for asking this question when it comes to $100k. When Trump's net worth was negative, he should have had his property taken away, and been handed a broom. "To put a different spin on it, suppose you loaned someone $100K, expecting that they would pay it back, and then a little later they decided not too. They are perfectly capable of paying back the money, but just decided they didn't want to, and it seems the laws of your state said you couldn't make them. How would you feel about that? Since this is supposed to be an answer to the question, the answer is: ""only if you can't afford to repay it"". That's what foreclosure is supposed to be about, not you deciding you would rather not pay your debts. Let's not forget who pays that bill for you - every one of your bank's other customers. EDIT:For the people decrying the moral aspect and saying ""it's perfectly alright because the law says that's the punishment and I'm willing to pay it"", the law also says ""if you kill someone, you go to prison for life"". Does that mean that someone who decides they are going to kill someone has a perfect right to do it as long as they are prepared to take the consequences?" This is a very personal situation of course, but if you can afford the repayments then I recommend keeping the house!. A house is a long term investment and one has to live somewhere. You probably didn't buy the house planning to sell it in 5 years so while in the short term you could suffer a loss on paper chances are things will pick up, they have to eventually. For each boom there is a bust, one for one. Very few people's credit is worth $100,000. The average homeowner's credit (family of four with good to very good credit) is worth about $30,000. This is a pure business decision. The bank knew the law when they extended the mortgage to you, and part of the amount they're charging you goes to cover the risk that you might opt to walk away. The mortgage was an agreement between you and the bank and it specified the penalty for you walking away. Taking the agreed upon penalty for an action specifically contemplated in the agreement is also keeping the agreement. "The worth of a credit score (CS) is variable.  If you buy your stuff outright with 100% down then your CS is worthless. If you take a loan to buy stuff then it is worth exactly what you save in interest versus a poor score. But there is also the ""access"" benefit of CS where loans will no longer be available to you, forcing you to rent. If you consider rent as money down teh tiolet then this could factor in. The formula for CS worth is different for everyone. Bill Gates CS is worth zero to him. Walking away from a mortage is not the same as walking away from a loan.  A mortage has collateral. There are 2 objects: the money, and the house. If you walk away the bank gets the house as a fair trade. They keep all money you put against the house to boot! Sometimes the bank PROFITS when you walk away.  So in a good market you could consider walking away to be the Moral Michael thing to do. :)" Many good answers here, especially that you have to consider that renting may be more expensive than you'd think. Also, keep in mind that rent is money that is completely lost. Even if the property has dropped in value, if you keep paying, you will be able to recuperate part of your mortgage payments when you sell the house. Normally this is about +-30%, but you need to calculate this yourself by dividing the expected sales price of the house by the total mortgage payments you have to make to pack back everything. So I'd say walking away only makes sense if the rents around where you want to live are much lower than (<+-30%) your mortgage payment, and stable. In stead of walking away immediately, perhaps you can refinance your mortgage with a new one? In 2008 the rates were around 5.8%, now they are around 3.6% or so. I don't know how it goes in the USA but in my country, if the rates drop, it is relatively to do this and it can save people who refinance thousands if not more.
There is a reason - your credit score. If you ever take out a mortgage, you might pay dearly for your behavior. The bank where you have the credit card reports the amount on the bill to the credit rating agencies. If you pay before the bill date, they will always report zero. You should wait at least till the day after the billing cycle ends, and then pay off (you don't need to have the paper bill in your hands - you can see online when the cycle closed). Depending on your other financial behavior, this will have between zero and significant effect, on the percentages you get offered for car loans, mortgages, etc. Here are the pros and cons and an analytical framework for making a decision. Pros of walking away: Cons: Here's the framework: compare the value of first and second sections for you [1] http://www.nytimes.com/2009/07/30/business/30serviceside.html?_r=0 [2] http://www.mortgagecalculator.org/ It isn't always clear cut that you should pay off a debt at all, particularly a mortgage. In simple terms, if you are making a better return than what the bank is charging you, and the investment meets your risk criteria, then you should not pay back the debt. In the UK for example, mortgage rates are currently quite low. Around 2.5 - 3% is typical at the moment. On the other hand, you might reasonably expect a long run average return of around 9 - 11% on property (3 - 5% rental yield, and the rest on capital gains). To make the decision properly you need take into account the following: Consider that the bank of course makes money on the money in your escrow. It is nothing but a free loan you give the bank, and the official reasons why they want it are mostly BS - they want your free loan, nothing else. As a consequence, to let you out of it, they want the money they now cannot make on your money upfront, in form of a 'fee'. That explains the amount; it is right their expected loss by letting you out. Unfortunately, knowing this doesn't change your options. Either way, you will have to pay that money; either as a one-time fee, or as a continuing loss of interest. As others mentioned, you cannot calculate with 29 years, as chances are the mortgage will end earlier - by refinancing or sale. Then you are back to square one with another mandatory escrow; so paying the fee is probably not a good idea. If you are an interesting borrower for other banks, you might be able to refinance with no escrow; you can always try to negotiate this and make it a part of the contract. If they want your business, they might agree to that. "Let's start with income $80K. $6,667/mo. The 28/36 rule suggests you can pay up to $1867 for the mortgage payment, and $2400/mo total debt load. Payment on the full $260K is $1337, well within the numbers. The 401(k) loan for $12,500 will cost about $126/mo (I used 4% for 10 years, the limit for the loan to buy a house) but that will also take the mortgage number down a bit.  The condo fee is low, and the numbers leave my only concern with the down payment. Have you talked to the bank? Most loans charge PMI if more than 80% loan to value (LTV). An important point here - the 28/36 rule allows for 8% (or more ) to be ""other than house debt"" so in this case a $533 student loan payment wouldn't have impacted the ability to borrow. When looking for a mortgage, you really want to be free of most debt, but not to the point where you have no down payment.  PMI can be expensive when viewed that it's an expense to carry the top 15% or so of the mortgage. Try to avoid it, the idea of a split mortgage, 80% + 15% makes sense, even if the 15% portion is at a higher rate. Let us know what the bank is offering.  I like the idea of the roommate, if $700 is reasonable it makes the numbers even better. Does the roommate have access to a lump sum of money? $700*24 is $16,800. Tell him you'll discount the 2yrs rent to $15000 if he gives you it in advance. This is 10% which is a great return with rates so low. To you it's an extra 5% down. By the way, the ratio of mortgage to income isn't fixed. Of the 28%, let's knock off 4% for tax/insurance, so a $100K earner will have $2167/mo for just the mortgage. At 6%, it will fund $361K, at 5%, $404K, at 4.5%, $427K. So, the range varies but is within your 3-5. Your ratio is below the low end, so again, I'd say the concern should be the payments, but the downpayment being so low.  By the way, taxes - If I recall correctly, Utah's state income tax is 5%, right? So about $4000 for you. Since the standard deduction on Federal taxes is $5800 this year, you probably don't itemize (unless you donate over $2K/yr, in which case, you do). This means that your mortgage interest and property tax are nearly all deductible. The combined interest and property tax will be about $17K, which in effect, will come off the top of your income. You'll start as if you made $63K or so. Can you live on that?" I have this exact same issue.  Event the dollar amounts are close.  Here is how I am looking at the problem. Option 1:  Walk away.  Goodbye credit for 7+ years.  Luckily I can operate in cash with the extra $800 per month, but should I have a non medical emergency I might be SOL.  With a family I am not sure I am willing to risk it.  What if my car dies the month after I quit paying and the bank chooses to foreclose?  What if my wife or I lose our job and we have no credit to live? Option 2:  Short sale.  Good if I can let it happen.  I might or might not be on the hook for the balance depending on the state.  If I am on the hook, okay, suck but I could live.  If I am not on the hook, it is going to hurt my credit the same as foreclosure.  It isn't easy, you need an experienced real estate agent and a willing bank.   Option 3:  Keep paying.  I am going for this.  At the moment I can still afford the house even though it is at the expense of some luxuries in my live.  (Cable TV, driving to work, a new computer).  I am wagering the market fixes itself in the next several years.  Should the S hit the fan in most any manner, the mortgage is the first thing I stop paying. I don't know what other options I have.  I can't re-fi; too upside down.  I can't sell; the house isn't worth the mortgage (and I don't have the cash for the balance).  I can't walk away; the credit hit wouldn't be worth the monthly money gain. I have no emotions about the house.  I am in a real bad investment and getting out now seems like a good idea, but I am going to guess that having the house 10 years from now is better than not.  I don't care about the bank at all, nor do I feel I owe them the money because I took the loan.  They assumed risk loaning me the money in the first place.  The minute it gets worse for me than for the bank; I will stop paying. Summary Not much to do without a serious consequence.  I would suggest holding out for the very long term if you feel you can.  The best way to minimize the bad investment is to ride it out and pray it gets better.  I am thinking I am a landlord for the next 10 years. I am sorry for your troubles, but impressed with your problem solving skills.  Keep going, things will get better.   Your best hope is to find a place that does manual underwriting.  If they do computer generated stuff, then you will be kicked for sure.  If you can show 20% down, and have some savings, and have some history of paying bills, then you might be approved.   Here in Florida, RP Funding still does manual underwriting.  Another one that is mentioned is Church Hill mortgage.  Also you might check with local credit unions. Of course your best bet to be approved is to be open and state upfront the challenges.  You have to find someone that has the ability to think, has the ability to see passed the challenges, and has the authority to do so. "You owe only $38,860 to pay off your loan now, possibly less.   From what you say about your loan, tell me if I got this right: 30 year loan $75,780 original loan amount 9% annual interest rate $609.74 monthly payment You have made 272 payments Payment number 273 is not due until late 2019, possibly early 2020 If I have correctly figured out what you have done, you have been making monthly payments early by pulling out payment coupons before they are due and sending them in with payment.  You are about 4 years ahead on your payments.   If I have this correct, if you called the bank and asked ""what is my payoff amount if I want to pay this loan off tomorrow"" they would answer something like $38,860.  When you pay a loan off early, you don't just owe the sum of the coupons still remaining.  In your case, you owe at least $16,000 less! Indeed, if there is some way to convert your 4 years of pre-payments into an early payment, you would owe even less than $38,860.  I don't know banking law well enough to know if that is possible.   You should stop pulling coupons out of your book and paying them early.  Any payments you make between now and when your next payment is actually due (late 2019 sometime?) you should tell the bank you want applied as an early payment.  This will bring your total owed amount down much faster than pulling coupons out of your book and making payments years early.   If there is someone in your family who understands banking pretty well, maybe they can help you sort this out.  I don't know who to refer you to for more personal help, but I really do think you have more than $16,000 to gain by changing how you are paying your mortgage.   Good luck!" From Getting Rid of PMI: Per the federal Homeowners' Protection Act, you can ask that your PMI be canceled when you've paid down your mortgage to 80% of the loan, if you have a good record of payment and compliance with the terms of your mortgage, you make a written request, and you show that the value of the property hasn't gone down.  What's more, when you've paid down your mortgage to 78% of the original loan, the law says that the lender must automatically cancel your PMI. (So in this case to prove it hasn't gone down, an appraisal is in order) But all of this doesn't answer the question. The PMI is a separate line item, once it's removed, your total monthly payment drops. You are welcome to keep it in, and indicate it should be a prepayment of principal, if that's your wish, but that's up to you, it's not automatic.  In researching this the first time, I ran into an article How to Calculate PMI Costs in which an example is given where a 91% LTV $200K loan has a PMI cost of $1000/yr. So, the impact of not having that extra $20K or so is to pay what amount to an extra 5% on the last $20K of the loan. The PMI doesn't scale over time. When you are $10K away from 80% LTV, you still pay the $1K/yr. For this reason, if you absolutely must go over 80% LTV, I'd suggest shopping for a bank that will permit the excess to be a home equity loan.  At least the payoff of that 2nd loan in totally in your control. Start the process by contacting the company that services the mortgage. They can answer all your questions. They should have a form that needs to be submitted. You will want to get from them the most up-to-date payoff amount X days from now. The amount changes each day. They will be sending you a document signifying that the debt has been met. They will also be filing paperwork with the county/city/township releasing the property from the mortgage obligation.  Because all my mortgage payoffs have either been or refinancing or I have sold the property, the balance due was significant and the lender required a cashiers check. Contact them to ask. If it only a few thousand left they might take a regular check. Sending the checks via overnight delivery speeds up the process, and cuts down on the uncertainty of the delivery date. Ask for a return receipt so that you have proof of the date it was received. Overpay by a couple of days. They will refund the overage. If you let the mortgage run its course, you will still get a document back from them; they will still file the documents with the local government; and they will refund any overage. If you look at the coupon book, or the paperwork they gave you at settlement the last payment is usually a different amount due to rounding of the monthly payments.  Of course if you have been making extra payments or larger than required payments the numbers on the original coupon book are moot so contact the company for the last payment amount. I think the OP took responsibility for their mistakes by walking away from their mortgage and living life with in their means. If it screws the bank, so be it, because the bank failed in its responsibility to do due diligence, whether that means figuring out if their mortgagee can pay over the life of the loan and/or if the housing market is a bubble.   And the houses were paid for by the banks. The house is the collateral for the loan the bank made. The banks distorted the market with their easy money, and now they have to pay the consequences. If you quit or get fired, you have 60 days to pay back the loan. If you cannot pay back the loan it becomes an early withdrawal subject to taxes and the the 10% penalty. Taking a loan for any significant amount of the down payment is a bad idea for the reasons above. As an alternative, adjust your contributions down to get your maximum match and stash the extra money outside of your 401k in a brokerage account. If you have a Roth IRA already, you can into using up to 10k of it for a first time home purchase. I would put down 12% and pay PMI.   Either way, you are taking out a loan, with payments against 88% of the value of the home. I assume the mortgage note would be either 15 or 30 years and the 401k loan would be less (5? 10?). If you take out an 88% mortgage loan and pay it off at the same pace you would have paid the 401k loan, you'll be down to 80% LTV quickly and PMI will stop.   If the housing market rebounds and your house appreciates, you'll be at 80% LTV quickly.  If you change jobs/lose jobs your mortgage will be unaffected.   PMI is an easily quantifiable risk that is worth paying in this case. Contrasted with the 401k loan, the job loss/job change risk is great.   It isn't just if you lose your job.  Maybe you'll find a great opportunity with a great company that has a 401k plan that doesn't allow loans.   Will you forgo taking that job because of your 401k loan? Never ever use a giant monster mega bank for home loans.  I am sure you probably didn't and they bought your loan from someone else.  You have no legal options.  What you should do Is look at getting a new loan maybe a 15 year loan.  Your payment might be the same with no PMI. I would check with a relator to see what they think your home is worth.  Also if you have any money you can always pay extra to the principle and get yourself to 20% based on the next appraisal.   You might have a legal option regarding what they say you need in value 350k is what it should appraise to for you to get rid of pmi when you owe 280k Remember Citibank is a publicly traded company and their goal is to make more money. The CEO has a fiduciary relationship with stock holders not customers.  They seriously have board meetings to figure out what charges they can invent to screw their customers and make shitloads of money.  There is no incentive for them to let you get out of your PMI. If you're planning to walk away from the house - don't invest any more money in it. Just be aware of the consequences. It may be worth considering a short sale if both the lenders will agree to erase the debt. If you're going to keep the house, then the fact that you're underwater now is irrelevant, and you should do your best to reduce the burden by paying off the higher rate loan. But, I personally think that accumulating enough cash to make you comfortable in case of a job loss for several months is a higher priority.