Strategic Default



PART I - THE DECISION:

Apart from emotion, the decision to permit a foreclosure to occur on one's home as opposed to continuing to pay the monthly mortgage may be a financial one. A home's current market value may be so much less than the amount of the existing mortgage(s) on it, that a homeowner may determine they cannot (or will not) wait for the home's market value to exceed the amount of the mortgage(s). Alternatively, if the monthly cost to own a home including the mortgage payment, real estate taxes, homeowner's insurance, (and any homeowners' association dues) exceeds the cost of renting the same home, a homeowner may decide that they no longer wish to own the home. This situation may be compounded by the fact that the homeowner owes much more on the home than it is currently worth (or will be worth in the foreseeable future). In this instance, the homeowner will most likely evaluate the following equation:

Monthly Cost of Owning Home - Monthly Cost of Renting Home = Monthly Savings by Renting Home Instead of Owning Home

This is a simplified equation. As the equation should take into account the tax benefits of owning a home and the current value of the home vs. the amount of existing mortgages on the home, you may want to use our DECISION ESTIMATOR TOOL.

PART II - THE CALCULATION:

Once a borrower has decided to allow their primary residence to go into foreclosure, the amount of their monthly mortgage payment does not matter in measuring the financial benefit of the Stay, Don't Pay approach. What does matter is "The Cost of Replacement." For example, the fact that a borrower, living in a 3 bedroom/ 2 bath home, with a $3,000 monthly mortgage payment, does not matter nor does it represent his/her monthly savings once the borrower decides to let the property go into foreclosure. What does matter is how much the borrower will have to pay each month to rent a comparable residence after the lender obtains possession of the home and the borrower must move out. This represents the monthly savings of the Stay, Don't Pay approach.

To illustrate, if a borrower would have to pay $1,700 per month to rent the same type of residence, the borrower is saving $1,700 per month for every month that they are able to live in their home without making a mortgage payment.. instead of moving out and renting another residence. In this example, every month that a borrower lives in the home will save him/her $1,700. One year's savings would be $20,400. Rent on a primary residence is not tax-deductible. Therefore, the borrower will have spent $20,400 of their take-home pay to rent a residence for one year. This Financial Equation helps borrowers understand how much money they may be saving each month.

 
Input Information

Housing Costs  
Current Home Value $
1st Mortgage Balance $
2nd Mortgage Balance $
1st Mortgage Interest Rate   %
2nd Mortgage Interest Rate   %
   
Monthly Costs
PMI (Private Mortgage Insurance) $
Real Estate Taxes $
Homeowners' Insurance $
HOA / Condo $
   
Additional Costs
Annual Cost of Maintenance of House $
Years You Plan To Stay in Your House   
Annual Change in Value of House Until Sold   %
Estimated Effective Federal Income Tax Rate of Household   %
   
Proposed Monthly Rent Payment $
 

Calculated Information

Total Housing Debt $0
Present Equity of House $0
Net Monthly Cash Flow Saved by Renting A Home $0
Total Stay, Don't Pay Cash Flow Saved by Renting a Home During the Years It Would Have Been Kept $0
Estimated Tax Benefit During Years You Would Have Kept Your House Before Selling It $0
Stay, Don't Pay Total Savings $0

Helpful Information

PMI (Private Mortgage Insurance)
PMI is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80% of their new home's value. In other words, buyers with less than a 20% down payment are normally required to pay PMI. If you have PMI on your first mortgage, input the monthly cost of the PMI included in your mortgage payment. If you don't have any PMI, enter "0."

Annual Cost of Maintenance of House
This expense represents the yearly cost of making repairs and maintaining your home. It includes lawn maintenance, swimming pool service, etc. The standard estimate is 1% of the present market value of your home. For example, if your home is worth $300,000, the estimated annual cost of repairs and maintenance would be $3,000. You may use the standard estimate of 1% or change it if you believe that your actual cost is greater or less than 1%.

Years You Plan to Stay in Your House
If you were to keep your home, how long do you believe you would live in it before you sold it and moved somewhere else?

Annual Change in Value of House Until Sold
We all know that home values across the nation have declined substantially over the last several years. Estimate how much more you believe your home will go down or up in value each year for the next few years until you would sell your home. Use a "-" sign for a decrease in value.

Estimated Effective Federal Income Tax Rate of Household
The effective federal income tax rate is the true net amount of income taxes that you pay for every dollar of income that you earn. It is determined by dividing the tax paid by the taxable income in a particular year. For example, if a taxpayer with a taxable income of $100,000 owes $25,000 in a year, he has an effective tax rate of 25%. The effective tax rate is useful in tax planning, because it gives a taxpayer a realistic understanding of the amount of taxes he is paying after allowing for all deductions, credits, and other factors affecting tax liability. The most recent data available indicates that the median household income in the U.S.A. is approximately $55,000. Based upon this amount of income and the IRS tax rates, the effective tax rate for a household income of $55,000 is approximately 18%. You may refer to the IRS website at www.irs.gov to review the income tax rates for your actual household income and use a different rate in the Decision Estimator Tool, or you may use the 18% rate if it approximates your income tax situation.

Proposed Monthly Rent Payment
How much would you pay per month if you were to move out of your home and rent another residence?

Present Equity of House
The present equity position of your home is calculated by subtracting the total amount of all mortgages on your home from the present market value of your home. If the resulting value is a negative figure, your home is commonly referred to as "underwater" or "upside down." This means that you owe more debt on your home than it is currently worth.

Net Monthly Cash Flow Saved by Renting a Residence
This figure represents the amount of cash you will save each month by renting a residence instead of continuing to own your home based upon your present total monthly housing expenses (mortgage[s], homeowner's insurance, real estate taxes, etc.)

Estimated Tax Benefit During Years You Would Have Kept Your House Before Selling It
This figure represents the estimated amount of income taxes that you would have saved for the tax-deductible mortgage interest, PMI, and real estate taxes which you would have paid during the years that you kept your home.

Stay, Don't Pay Total Savings
This figure represents the total amount of cash you would save by renting a residence for the number of years that you would have kept your home. This calculation also takes into account the future equity position you would have had in your home and the tax benefits that you would have received during the years that you would have kept your home. CAUTION: If the resulting value is a negative figure, you should consider attempting to keep your home.