Should You Walk Away from Your Mortgage?

Should I Walk Away from My MortgageEven though the recession has been “officially” over for quite some time, many people are still feeling the pinch.

Indeed, many homeowners are starting to feel worried about what’s next. With home values still low, many are underwater on their homes — and worried about how long it will take to move from negative equity to positive equity.

Others not only have negative equity, but are also having trouble making payments. With tough choices ahead, the prospect of strategic default (i.e. to walk away from your mortgage) becomes increasingly attractive. But is it something you should do?

Financial Considerations of Strategic Default

From a strictly financial standpoint, strategic default can make sense in some cases. If you are struggling to make your mortgage payments, and you can’t refinance or get a mortgage modification, foreclosure might seem inevitable.

As a result, some choose to stop making mortgage payments. With the backlog, it can take anywhere between three months and more than a year for a foreclosure to go through. That means that you could live in your home — and save up what you would have paid on your mortgage — free of charge for a few months.

Others, concerned about how long it might take for the housing market to recover, might decide to cut their losses now, by walking away, rather than continue to make mortgage payments without building equity. Still others don’t want to deal with the hassle of trying to sell (or rent out the home) if they are in a position that requires them to move. A strategic default can rid them of the home.

However, it’s important to realize that a foreclosure can have a big impact on your credit score, dropping your credit score by as much as 200 or 300 points. It can take two or three years after your foreclosure for your credit score to begin to return to a respectable level that would allow you to buy a home, or get good terms on other loans.

Moral Considerations of Strategic Default

Once you have considered the financial ramifications of walking away from your home, you need to examine whether or not you consider strategic default a moral option. For some, it’s a no-brainer if walking away has the greater financial benefit; no qualms there.

One of the justifications for strategic default, especially in cases that involve mortgage re-sets and interest only loans, is that the lender shouldn’t have agreed to a loan that the homebuyer couldn’t truly afford, and that their greed is just as immoral — or more immoral than — the decision to walk away from a home.

For others, though, not paying on an obligation is seen as a moral problem. After all, when you walk away, you are breaking a contract, and you aren’t fulfilling your end of an agreement. Morally, is it right to borrow such a large sum of money, and agree to pay it back, only to renege because you regret your decision?

Most people, though, seem to think that a foreclosure is acceptable if you really have no other viable option. Being forced into it creates a situation in which you can honestly say that you did all you could to avoid foreclosure, but to no avail.

What do you think? Is it ok to walk away from your mortgage and home?

Photo by Valentin.Ottone



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Comments

  1. I think there is no gray area morally on this issue. The homeowner knew or should have known much better than the mortgage company whether or not they could afford the loan (those laid off and with other unforeseen medical and the like issues excluded)! The homeowner knows how much they make, and all of their expenses, including the ones the bank would never know about – like going to Starbucks every day, or the casino twice a week, or the money in the Church’s collection plate… The homeowner signed the documents, and was just as greedy as the mortgage company – for money, for status, or simply greedy to live their dream of owning a home. I’m no friend of the bank, but I’ve never felt I could morally justify my bad behavior because of someone else’s.

    Anyone who thinks the mortgage companies are the only ones taking the shaft on these walkaways and foreclosures is very short-sighted. It affects every single one of us. Every. Single. One.

    I have plenty of empathy for those who have lost their jobs or had their incomes drastically cut. We’ve suffered two pay cuts ourselves. I consider us lucky that we made the smart decision to take out a mortgage that we could afford on a McDonald’s salary. In fact, we’ve moved out of the house (and in our neighborhood they are now selling for less than we paid) and into someplace cheaper and now rent it out, making a small profit.

    I’ve talked to people whose attitude is, “Yes, I sucked every bit of equity out of this house’s overinflated value and bought cars and took trips and partied and put in a new kitchen, but that’s the bank’s problem. If they don’t give me a reduction I’m just going to walk away.” I’ve heard of people who took out HELOCs, used that money for a down payment on a new place, and then walked away from the old. Karma, folks.

    I know people are making the choice to walk away. I know that for some it’s necessary to survive. I really get that. But in my opinion that doesn’t make it any less morally wrong. And I can’t say that I wouldn’t do it, too, if I was in such a dire position.

    But I wouldn’t justify it, and try to paint it as a morally sound choice.

    (And, people, if you leave your house and leave your animal in it to fend for itself, you should die a slow and horrible death. Twice.)

    • I agree. We need a solid, moral base to rely on so that we (as an economy) can move forward financially. I’m not sure that we’ll ever get that back to where it was though.

  2. While I agree that it is morally reprehensible, we as a nation have determined that we will not legislate morality. We have taken any reference to morality out of our schools by not allowing display of the Ten Commandments or any other reference to a higher authority than the state. Thus, if it isn’t illegal, it is OK.

    The fact of the matter is that walking away is stealing plain and simple. But it is not viewed in that context any longer. And thus our country will be paying the consequences.

  3. Super Frugalette says:

    I think plenty of people make amoral decisions. However, there are people who lack options on account of medical or employment issues. Even in bankruptcy, you can often stay in your house.

  4. I disagree with many of the comments. I think that both the mortgage company and the mortgagee are entering into a business agreement. There are risks on both sides, and it was pressured and represented to many “Don’t worry, take the interest only loan, and in 10 years, you can refinance to a fixed when you are making more money.” Problem is, most can’t do that, cannot afford the payments, and end up making a decision. This was bound to happen in my humble opinion.

  5. JohnTebbetts says:

    Great article! Readers of this article may also benefit from this recent blog post: “Should I Walk Away From My Home Mortgage?” – http://www.usahomebuyer.net/SellHouse-Blog/RealEstateBlog.html?entry=should-i-walk-away-from