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Should You Walk Away From Your Home Mortgage?

In 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

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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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