Throughout this economic downturn, many homeowners have been forced to make a tough choice: Should you walk away from your mortgage when you owe more than what your house is worth, or should you continue to struggle and pay off your debts? More Americans are choosing to walk away.
A study released by the University of Chicago and Northwestern found that 31% of homes that were foreclosed in March of this year ended in strategic defaults, the process by which homeowners can walk away from their mortgages. By comparison, just 22% did that one year prior.
Yet, according to a recent New York Times piece, many of the people who are taking advantage of this option are not people on the bottom rung of society but rather in the upper class. “More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic,” the Times reports. Meanwhile, just one of every 12 mortgages less than $1 million are delinquent.
The Times notes there are more and more extravagant multi-million dollar homes that have been foreclosed on and abandoned in communities like Chicago and Las Vegas. And contrary to what one might assume about those who walk away from their mortgages, the analyst behind this study hinted that the wealthy are turning to this option well before it’s their last resort.
“Those with high net worth have other resources to lean on if they get in trouble. If they’re going delinquent faster than anyone else, that tells me they are doing so willingly,” Sam Khater, the senior economist at CoreLogic, told the Times.
In general, if you are debating whether to walk away from your home, the deciding factor should be how much you are underwater on your mortgage. As Brian O’Connell wrote in a recent MainStreet Q&A on the subject, “If you’re more than 25% underwater on your mortgage (i.e. if the house is worth $150,000 and you owe $200,000 on it), then it makes sense, from a financial perspective at least, to drop the keys in the mailbox and walk away. “