Even in good times, having a mortgage sucks.
A 30-year note on your house is like a prison sentence. You feel trapped, a slave to the mortgage company for three decades.
When you’re struggling financially – as many people are today – steep monthly payments become even more onerous.
So why not just walk away – stop making payments and let the mortgage company take back your house?
“Look at it as a last resort, not a first option,” says a recent Reuters article.
If you’re struggling with your mortgage payments, pursue refinancing first, the story advises. Today’s interest rates are near-record lows of 4 percent. Not everyone qualifies for the rock bottom rate, but it’s worth investigating.
But for some people, even much lower monthly payments won’t help. They’re “underwater” on their home – meaning they owe far more than the market value.
For instance, someone buys a house for $350,000 at the height of the real estate market. Now, it’s appraised at only $225,000. The homeowner could make mortgage payments for years – even at a lower interest rate – and still have a house that wasn’t worth nearly the purchase price.
What to do?
At this point, it might be wise to default on the mortgage.
“People think it reflects on their integrity, and say, ‘I wasn’t raised that way,’” says Carl Archer, a New Jersey real estate attorney, in the Reuters article. “But the more businesslike attitude is to say that there’s a contract, there are penalties for violating that contract, and sometimes it just makes financial sense to break it.”
One of the biggest considerations: the damage to your credit score. It could take a huge hit if you default on your mortgage, meaning you might be unable to get loans for several years. Even if you’re offered a loan, it might be at an exorbitant rate.
The American Bankers Association says a foreclosure drops a FICO credit score 100 to 400 points. FICO scores, used by lending institution to determine credit approval, range from a low of 300 to a high of 850.
Foreclosures remain on a credit report for as long as seven years, with the person’s creditworthiness gradually improving.
A person has to weigh whether the relief of getting out of an oppressive mortgage would be better than long-term credit damage.
“A large number of Americans who are underwater on their mortgages would be better off financially if they walked away from their homes,” says Brent White, a University of Arizona law professor. “They don’t because we have a double standard…individuals are told they have a moral obligation to pay their mortgages and corporations understand that contracts are to be breached when it’s not economically efficient.”
He’s written a lengthy report called “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.”
Even though more people are defaulting on their mortgages, it’s not a decision that should be taken lightly. Consult an expert, such as an attorney or accountant, to help you decide if walking away is right for you.
Opting for a “strategic default” could improve your financial situation or make it even worse.
If you’re struggling to make your mortgage payments, consider all your options. There’s no one-size-fits-all solution. Refinancing at a lower rate might provide all the help you need. If you choose to default, make sure you’ve done your homework first. Otherwise, you could regret the unforeseen consequences.