Even 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