Underwater: Keep paying mortgage?

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Dear Dr. Don,
My wife and I purchased a home in 2006 for $286,000. We have an 80/15/5 mortgage on a 10/1 adjustable-rate mortgage. Due to the home price collapse in Phoenix, our home is worth about $170,000 and we are paying a $1,700 mortgage payment every month for a home that just doesn’t seem worth it. We can make our payments, but there isn’t much left over at the end of the month to do anything else.

We plan on moving to another state in five or so years and I just don’t know what to do. Should we try a short sale and just rent until we decide to move, or stick it out and see what happens? I just can’t imagine even breaking even on the house when we move in five years. And meanwhile I am throwing $1,700 away every month. Please help.
— Daniel Debtor

Dear Daniel,
Like you, I’m conflicted. Getting the second mortgage holder to sign off on a short sale will be problematic. With an estimated home value of $170,000, your equity isn’t the only equity position to have vanished with declining home values. Even the first mortgage lender will take a big hit with a home sale at $170,000.

That said, if you can get out on a short sale, take advantage of that opportunity. It will leave your credit in much better shape than what would happen in a foreclosure. The Bankrate feature, “Walking away from mortgage is costly,” explains what can happen in foreclosure or in a short sale.

I take a fairly conservative position, where you are the one investing in real estate and the lender is investing in you. That point of view says if you can afford to make the mortgage payment, you’re ethically bound to continue making the payments. Investments don’t always pan out — just ask most stock investors. They took the hit when their portfolio values declined over the past two years, so why shouldn’t you?

Negative information stays on your credit report for seven years. Ask yourself how much you are really saving by renting in the Phoenix area over the next five years versus staying current on your mortgage, property taxes and insurance. If there aren’t significant savings, you’re better off keeping up with the payments on your mortgage.

You’re not throwing away $1,700 a month. The mortgage payment is buying you shelter. You should be concerned about the difference between the all-in cost of owning a home versus the all-in cost of renting plus the loss of your investment and the potential black mark on your credit history. How much money is too much of a cost to bear in maintaining your good credit? There’s not one right answer, just an answer that’s right for you.

To ask a question of Dr. Don, go to the “Ask the Experts” page, and select one of these topics: “Financing a home,” “Saving & investing” or “Money.” Read more Dr. Don columns for additional personal finance advice.