Should I Walk Away from My Mortgage?

Since the collapse of the housing market in almost every U.S. city over the past year, especially here in southern Florida, almost all our clients have the same problem: their homes are worth less than their mortgage. Almost every day someone calls to say, "Should I just stop paying my mortgage?"

Even though we do provide a lot of financial advice, and we actually have developed some relationships with local lenders so we can help our clients get their mortgages repackaged, we never advise anyone to walk away from what is a responsibility.

When you buy your home, no one promises you that your home will keep increasing in value. We hope, and we assume. However, even without such a critical collapse of the financial industry, there have always been periods of time when all homes decreased in value. We just never realized it. The decrease may not have been terribly substantial, but nevertheless, it happens. All the time.

I spoke to a very upset client the other day. His home has gone down $40,000 in value over the past year. He and his wife decided to stop paying their mortgage and asked me for my opinion.

I replied, "Tom, are you still paying for your BMW? Are you still contributing to your 401(k)? Are you still paying for your timeshare in the Bahamas?" He said, "Well, of course!"

I explained that each of these had devalued considerably as well - so why decide to keep paying for these but refuse to pay the mortgage? I further showed him that his $53,000 BMW was now only worth $32,000 - yet he was still paying back his loan each month. Why? "Well, they'll take my car if I don't."

He then told me he had sat down with his daughter to go over numbers. She had convinced him he would save $3,100 a month which he could put into a savings account and gain interest. He thought this made lots of sense. I asked him, "What about the $75,000 down payment on your home? Your $185,000 in equity? Walk away from your house and you will never recoup that money."

He finally understood what I was trying to tell him. A mortgage is a commitment. The lender never promises that your home will retain its value. All the lender does is lend you money and expect to be repaid. It's a fair swap. It makes no sense to just stop paying an obligation simply because the object has decreased in value.