Clients ask my opinion daily about what to do with homes subject to mortgages with rate adjustments in the offing.  There is no pat formula that provides a universal answer, but here are the factors to consider.

• What is present spread between the monthly mortgage payment and the cost of renting comparable housing?  That spread, with some adjustment for the tax benefit of home ownership, is the investment portion of the monthly payment.  What kind of return could you get on alternative uses of the investment portion?
• Could you live reasonably and make the payment on the principal balance if the loan was a fixed rate loan at today’s interest rates?  If the principal balance is simply more than you can repay even with a good loan, then absent some hope of loan modification, you may be wise to simply walk away.
• Is the loan balance significantly more than the value of the property today?  To the extent you are paying more than the price of rental housing, the larger the difference between today’s fair market value and the loan balance, the longer it will take, even in an environment of rising real property values, for your investment to have any equity.
• How close to retirement are you?  Mortgage payments that are barely tolerable during your working lifetime may simply be impossible on a retirement income.  To what extent are your plans dependent on being able to sell the property promptly when your income changes?

For many, the strategy for realizing some money from the disposition of the house may be to live in the house and make no mortgage or property tax payments until the lender forecloses.

In California, the interval between the last payment and the foreclosure sale has traditionally been 7 months (3 months of payment defaults, and 4 months in the formal foreclosure process).  With the surge of foreclosures, those timelines seem to be lengthening.

Multiple the monthly mortage payment and property tax payment by 7 or more, and that may represent the best return on a house to a strapped homeowner in the world of adjustable rate mortgages.

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