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Should You Walk Away From Your Home Mortgage?

By David Bakke

should I refinanceIn the midst of the current housing market crisis, there are a percentage of people out there who have simply decided to walk away from their home mortgage. For some, they had a part in making the decision, and for others it was made for them. The two main reasons people chose to do so are negative equity in the house and job loss, or a combination of both. We also recently recounted what to do when you’re upside down on your mortage in our Help A Reader segment.

Negative Equity

I am currently employed and have never missed a payment on my home throughout this entire economic and housing debacle. I guess I am one of the luckier ones. However, some recent research that I was doing revealed that homes in my very own neighborhood have been selling for as low as $38K. Although I expected this figure to be low, this number was shocking to me. I purchased mine for $105K in 2000. Since most homes in my neighborhood are about the same size, my novice assessment of the situation was that I still owe approximately $96K on my house and if I had to sell it, I’d be lucky to get $50K.

Walk Away?

So, it stands to reason that any logical person would just walk away from this mortgage, right? I owe twice what my house is worth. The math is short and simple. It could take decades for this situation to balance out, and I’d be better off just walking away and starting over, correct?

Too Many Reasons Not To

As I thought about it in more detail and got opinions from some experts, it turns out that the answer, at least in my situation, is a resounding “No.”

Your Credit Score

If you decided to walk away from your mortgage, your credit will take a massive hit that could take as many as ten years to recover from. Ten years is a very long time. Yeah, you might get some relief in the short term, but a bad credit score will haunt you for years to come.

Unethical/Unpatriotic

It is my firm belief that as long as I have the ability to do so, that I should continue to make my monthly housing payment and simply “tough it out” through this housing decline. Should I ever lose my job, then of course, the story changes. However, if you are able to make your payment and simply choose not to do so because of the economics of the situation, to me, that is unethical as well as unpatriotic. There are enough negative forces acting upon our economy right now; we don’t need any more impacting it.

Markets Can and Will Return

Although it may be hard to believe at the moment, the markets can and will return. They always do. Or, at least they always have. It may take quite some time for the markets to get back to where they were just a short time ago, but now is definitely not the time to give up hope. Are they coming back already? According to the people I spoke to, probably not yet, but at least the declines seem to have bottomed out. One trick I learned from a real estate agent in my area is to compare recent sale and listing prices. For example, if recent sales are at $75K, and listings are at $90K (assuming most homes in your neighborhood are of the approximate same size) then your individual market is still in a decline. If the tables are turned and listings are lower than actual sales, then the market is beginning to come back.

Exclude Foreclosures

If you ever decide to look at what home sales are doing in your particular area, keep in mind to exclude foreclosure sales. This is where I was originally getting my shocking numbers from. The homes that sold in the high thirties and low forties were foreclosure sales. Unless you plan on foreclosing, your home would not sell so low.

Seriously Consider Refinancing

One conclusion that I did come to is that a refinance of my current mortgage would be in my best interests and I’ve decided to move ahead with one. Why? Rates are as low as they have been in history. I am reducing my loan from 6% to about 4.25% and am going to reduce my payment by about $100. There are no out-of-pocket expenses for me. There are closing costs involved (as there always are) but rather than paying for them upfront, I am simply “adding” three years to the end of the mortgage and also gaining significant monthly savings immediately. To me, the extended length of the mortgage doesn’t really matter because I plan to stay at my house for the long term and be there for the entire length of the loan. For details about an actual refinance, check out a recent post from one of our writers (including tips from you, the readers) who asked: Should I refinance my mortgage?

It’s my firm belief that unless circumstances force you to, you should not walk away from your mortgage. There are many more advantages to sticking with your current mortgage and simply toughing it out. The future is probably not as bleak as you think it is, the markets will come back (they always do), and if you can just “bury your head in the sand” regarding your house note for the near future, I think you’ll find that you made the right decision.

The housing market is quite a hot-button issue these days. Share your thoughts on the market, its potential return, and refinancing below. Do you think it’s the smart thing to do to walk away from your home mortgage? Is it the ethical thing to do?

(photo credit: notionscapital)

David Bakke
David started his own personal finance blog, YourFinances101, in June of 2009 and published his first book on ways to save more and spend less called "Don't Be A Mule..." Since then he has been a regular contributor for Money Crashers. He lives just outside Atlanta, GA and most all of his free time is taken up by his amazing three year old son, Nicholas.

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Comments

  • David Bibby

    A friend of mine is in a seriously upside down situation. When he bought the home a year or two before the housing crisis.. he signed up for a $250k interest only mortgage with a balloon payment after 10 years. The idea, obviously, is that he’d be making high income by that time.

    Presently.. he’s been in the house for 5-6 years now..the house is worth $90k..and in all this time he has not even TOUCHED the principal. Also.. when the payment balloons up in another 4 years or so.. he’s not going to be able to afford it.

    Should he stay or walk?

    • David/moneycrashers

      David

      Wow, that’s a tough one.

      But as I said…if he is employed and able to afford the payment, in my opinion he is “morally” obligated to pay the loan.

      If he can’t make the payment, then, that’s a different story.

      And everyone has their own set of morals, so I guess its something he needs to decide for himself.

      Great insight…

  • http://ww.debt-tips.com/blog Kris

    Let the bank decide. If they offer help, you should take it. Walking away without exploring all options is not good for anyone.

    • David/moneycrashers

      Kris

      Great response. You’re right–you should at least explore all options before making any rash decisions.

      Remember, when it coems down to it–the bank desn’t want your house. They will work with you in a lot of ways.

      Thanks for chiming in

  • Brandy

    yeah i’m kinda freaking out. We are on an ARM and next year it adjusts… if the market stays down should the arm really go up???
    Thanks. Brandy

    • David/moneycrashers

      Brandy

      That depends on what your rate is at now.

      I’d contact your lender and see what they think will happen with it and try to make some plans from there.

      Thanks for commenting

  • http://www.JoyInOurJourney.com Julieanne

    Wow – where do you LIVE!!! We live in a town with some of the highest unemployment rates in the nation, and very low paying salaries and hourly wages, and yet houses are STILL expensive. Housing prices dropped a little bit, but not much yet. For $38,000, the only thing someone could buy here is a tiny, 30-year-old, single-wide trailer/mobile home in a trailer park. Honestly. It is very strange. Two hours south of us, in a much bigger town/city, the housing prices HAVE really dropped, but strangely enough, they just haven’t gone down that much here. So, houses just aren’t selling here; no one’s biting on anything yet.

    I guess the one good thing is that most people aren’t upside-down in their mortgages here, or if they are, it isn’t by much. Strange that our little low-income town has mediocre houses that are priced the same as houses in the bay area in CA.

    • David/moneycrashers

      Julieanne

      That’s quite a unique situation.

      I think the best thing to do is to hang tight and wait for things to recover. I obviously don’t know when, but the markets will come back–they always have.

      Thanks for commenting

  • Melissa

    Are you sure you can refinance if your mortgage is more than the house is worth?

    • David/moneycrashers

      Melissa

      Great question, and actually, I am waiting to find the answer out myself.

      If my home doesn’t appraise for “enough”, then I wouldn’t even qualify for a re-fi.

      Luckily, I have amorgage expert in my circle of contacts who knows all the ins and outs of this stuff.

      He’s getting back to me around the end of this week.

      Keepng my fingers crossed…

  • Skip

    I am upside down in my house. I tried to do something through citifin who holds the mortgage. The way they crunch numbers and use gross salary, I did not qualify. There is a big difference in gross and net. If I took home my gross there would not be a problem. To make matters I have a big co pay for a recent medical situation. If you have any ideas we would like to hear them.So much bamas billions to help

    • http://www.moneycrashers.com david/moneycrashers

      Skip

      That’s a toughie w/o a little more info.

      Are you able to make your monthly payment is it stands?

      If so, I think you need to tough it out till the markets return.

      I’m completely upside down in my house and honestly, I don’t even think about it and I’ll try not to till the markets return

      If your mortgage were held by Freddie Mac or Fannie Mae, they have some programs, but I know that’s not relevant.

      Wish I could be more help……but I know misery loves company because I’m about in the same boat

  • Pingback: Friday Scoop on Credit Karma & Housing Market News | Credit Karma Blog

  • J Russ

    I don’t understand how this is even a moral issue? If the home is upside down, you need to do a cold calculation as you would any other business decision. If your note is more than 30% upside down, then, unless the bank will cut the PRINCIPAL payment owed on the property, you are better off walking. Period. YOU are the CEO of YOUR family. You manage your kids college fund, your families food expenses and budget. YOU have a fiduciary responsibility to them, just as a corporate CEO has a fiduciary responsibility to their shareholders. If you are not making good decisions based on sound economics then you are derelict in your duty to them. Does being a “patriotic american” pay for your daughters education? Does a good credit score improve your cash position? It always surprised me how a credit score is not determined by how much net worth you have, but by how much credit (debt) you have. I would rather be Bill Gates and have a 550 credit score than Joe Smith with a 770 and a car note, house note, and 3 credit cards. That is not ownership, that is being “owned” Get out of the “consumer” mind set of “gotta have the best credit score” and get the CEO mindset of “what does my balance sheet look like”. Only then will you realize REAL wealth.

    • david

      Commonsense:

      I appreciate your repsonse. My only point about it being a moral thing was that if everyone did that in this country–I think the housing market collapse would have been more catastrophic than it already was.

      I am able to pay my house note, so I am doing so. Hopefully, the markets will return so I will no longer be upside down.

      This has not nor will it affect my ability to provide for my family.

      But all of your points make perfect sense and I certainly couldn’t argue withawnyone taking that position

      Thanks again for responding

  • Bruce

    Do to money that seized four years ago by the government in what they deemed as a ponzi scheme, (the case still has not gone in front of a judge) my wife and I are in a deep financial hole. We owe about $300,000 not including our home.
    I recently lost two investment homes to foreclosure and I am currently two month behind on the mortgage where I live. We have paid over $60,000 in interest over the last five years and the house is valued at about what we owe.

    I am currently unemployed and Chase Bank has garnished my wife’s paycheck to the tune on 70%. My credit score, which was an 805 is now subterranean and my wife’s is in the same vicinity.

    Because on Bernie Madoff, my wife and I are going to get back a little over $28,000 in taxes over the next nine months. My question to you is strategic. Given these set of circumstances, would you walk away?

    • David/moneycrashers

      Bruce

      First, I think you’ve got the market cornered on “unique situations”. There’s certainly a lot of factors there to consider.

      It’s a tough one all the way around, but I will say this–if there was ever a case to be made for someone to go ahead and walk away, Ithink it would be this one.

      After what’s happened to you, I’d be hard-pressed to say I’d do any different if I were in your shoes.

      With what’s happened to you, there just simply aren’t a lot of good reasons to continue paying on your home.

      I wish you the best of luck in your situation, and thanks very much for commenting

    • Mike

      Yes I would walk away and file chapter 7. I wish you and your wife the best of luck.

  • Bruce

    That should read “Due” not Do”.

  • Mike

    It is ethical to walk away. I’m sorry, but a house is an investment. If you bought stock, and you sold that stock before the price dropped, are you an unethical owner of that stock?

    When you walk away, depending on the state you live in, you may owe the lender, which can be resolved in bankruptcy if you are in a crisis. Buying a house is a business transaction.

    A home can be anywhere, and if you have the right mindset, you can be happy living anywhere as long as you have family and friends, and you are willing to take care of your family and friends.

  • http://www.granny-makes-scents.com GrannySuze

    My son is in a terrible situation. He lived with a roommate in a 3 bedroom slab house. Nothing fancy, but good enough. Girlfriend enters picture, she moves in. She announces there’s a baby coming. (Let’s not assume that these people are teenagers, they both should have known how babies are made!) She empties house of my son’s “not good enough” furniture and dishes and pots/pans, etc. She also empties the house of previously mentioned paying roommate. The baby arrives. Life is good. She decides not to go back to work. (She also doesn’t cook or clean, but that’s another story.) Then, she and her mother ridicule my son saying he can’t take care of his family. Sheesh! Certainly it wasn’t what he signed up for!

    When “mortgage modification” started showing up on the 6 o’clock news, he spoke with his lender (Chase) to see if they might be able to adjust his rate as he’s about $60K upside down in the $120,000 mortgage. . They told him he had to be a month late before they would talk to him. Up to then, he was struggling, but not behind. So, he goes a month behind and calls them again. They send him paperwork to fill out and they tell him a revised amount to pay, a whopping $120 less than before. Car breaks down. Girlfriend leaves with baby to go live with her mother, empties house again on her way out. Then she tells him she wants $800 per mo child support. She says she shouldn’t have to live with her mother, so he should pay part of the rent for an apartment.

    He pays the agreed upon reduced amount on the mortgage for 7 months. Gets a letter saying he’s disapproved for his loan modification. They tack on late fees and the $120 per month for the 7 months. (Did Chase get any bailout money ???) They now call him every day and harass him. He has asked if they will take the owed amount and put it on the end of the mortgage. They said, “no.” He asked if they would accept the regular payment plus a little extra to put towards the owed amount. They said, “no.” He asked what the minimum amount they would accept to not foreclose on him. Between the two of us, we came up with $1,800 (double payment) for the end of August. They tell him today they want another $1,800 and want his bank account information to take it automatically on the 29th of Sept. He won’t have it. I don’t have it.

    He’s in a 5 year ARM, 3 years to go. He asked if he could refinance. They said he doesn’t make enough money. Though they were perfectly happy to prey upon him to approve the initial loan. I just don’t get it.

    I shudder at the prospect of having him walk away, but I don’t see how he can continue as things are.

    So now, there’s no roommate, child support (though not $800) and upside down in the mortgage.

    What’s a mother to do ?

    Note: This is only one side of the story. She may have cleaned once or twice.

    Do you need a lawyer to walk away ? Can the bank garnish his wages if he contacts them and thanks them for their willingness to work with him but take the house and put it where the sun don’t shine?

    Many thanks for advice!

    GrannySuze

    • http://www.moneycrashers.com david/moneycrashers

      GrannySuze

      Hey there. All i can really say is “Wow”. With a capital W. Although I’d like to comment on your son’s luck/choices regarding women, I’ll leave that alone. I guess sometimes we just don’t see it coming.

      Re Chase–if it were me, I’d see what kind of “proof” I had about the loan modification and the becoming late on the mortgage, and the advice to pay less. Like, is any of it in wiritng, or do I have any proof about it at all….

      Then, I’d consult an attorney about that aspect of it alone to see what they say. It sounds even beyond underhanded.

      Then, I’d get out there and find another roommate….fast. Then, I’d probably look for a seond job. Or something to bring in some more money.

      I doubt you need a lawyer to walk away, but I would probably get the (free) advice from one first on the subject.

      As I understand it, “walking away” would involve declaring bankruptcy, in which case the bank couldn’t garnish his wages.

      But I am not an attorney so don’t take that as binding advice.

      I certainly wish you luck and would love to hear about how the whole thing plays out….

      Thanks for commenting

  • Big_tony1979

    I bought my house in 08′, apopka ,fl and financed 145k, only putting 2500 down. So far I have remodeled a bit inside the house, however it needs a new roof, new air ducts and a/c unit. the houses in the neighborhood have been selling for 70k +/- 10k. Right now we a just making it by with the bills. My wife drives 20miles oneway in daily traffic only to barely to get to work on time, as i work nightshift and try to get home in time to get one of the kids to take to school. We have 3kids and no savings. My neighbor quit paying on his house the day we moved in , which he paid 210k for in 2006, he sold it last month for 72k on a short sale. I tried in both 09′ and 10′ for remodification and got denied. i went upto 4 mons behind as the bank told me to do, as there would be more options for modififcations. the bank denied they said that and after further arguing and threats, they reported to the credit companied to fix my credit. My credit score is 650, was 790 when i bought the home. i did settle with one credit card and have another in collections. I was put fo work for 9 months in 09′ which cause me to fall behind. im current on my bills, but we cannot save any money period, due to bills. I was wondering is it even worth to stay, with all the repairs still needed. The a/c is estimated to cost 5k and another 9k for the roof and prob another 5k for exterior repairs on the home.

    • Big_tony1979

      Another thing to add is that it is a fha 30yr 6% Bank of america loan

      • Davidbakke

        Tony

        That’s another tough one. The only thing I would suggest is to consult a financial advisor on the pros and cons of staying, and to consult an attorney regarding what the bank told you, and then claimed that they didn’t tell you. I know that is probably not of much help, but I wish you well in your difficult situation.

        Thanks for sharing

  • Kristiejmontgomery

    we are upside down in our mortgage by about 25k and the balloon note is coming due in 2 1/2 years and our credit score is 750 and it is not a freddie mac or fannie may loan. so what are our options?

    • Davidbakke

      Kristie

      It took me awhile to get back to you, but I wanted to do a little research. Your options are limited no doubt, but help may be available. Contact your lender and ask if they participate in the Home Affordable Modification program (HAMP) or something called the Principle Reduction Alternative. These are principal reduction programs and not refis, so I’m not exactly sure that will help. If you’re looking for a straight re-fi, contact your lender and explain your situation. They’re much more willing to help than they ever used to be. They don’t want you to default as much as you don’t…

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