Mortgages

What Happens When You Walk Away From A Mortgage

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 4 minute read

There are some folks who have merely chosen to default on their mortgage in the middle of the current property market turmoil. Some people participated in the decision-making process, while others had the decision made for them. 

Negative equity in the home and job loss, or a combination of both, are the two key factors that influence people’s decisions. In a recent episode of our Help A Reader segment, we also discussed what to do if your mortgage is upside down.

Equity Negative

All through this economic and housing disaster, I have maintained steady employment and have never been late on a mortgage payment. One could say I’m one of the lucky ones. However, I found out from some new research that homes in my area have been selling for as little as $38K. 

The actual sum was astonishing to me because of how low my expectations were. In the year 2000, I paid $105K for mine. Since most of the houses in my area are roughly the same size, I made the naive assumption that even if I managed to sell it, I would only be able to recoup around $50,000 of the $96K that I still owed.

Walk Away?

It follows that a rational individual would default on this mortgage, correct? There is a huge disparity between what I owe and what my home is currently valued. A quick and easy calculation. Since it might be decades before things are even again, I should probably just give up and start over, right?

Too Many Disadvantages

After giving it some more thought and soliciting the advice of professionals, I’ve come to the conclusion that the answer, at least in my case, is a resounding “No.”

Your FICO Score

Defaulting on a mortgage will severely damage your credit score, making it difficult, if not impossible, to obtain new financing for at least ten years. A decade is an extremely long time. Sure, it could help in the near term, but a low credit score can follow you around for years.

Unethical/Unpatriotic

As long as I am able to, I intend to keep up with my monthly mortgage payment and tough it out during this housing market downturn. If I were to ever lose my job, things would be different. 

However, if you are able to make your payment but choose not to due to the state of the economy, in my opinion, you are being unethical and unpatriotic. Right now, our economy is being impacted by enough unfavorable factors without adding any more stress.

Markets Will Return and Can

Markets can and will recover, even if that seems impossible right now. Of course, they will. Or at least they always have. However, while it may take some time for the markets to recover to their recent levels, now is most certainly not the time to give up hope. When do you expect them to return? 

The people I’ve talked to indicate that we haven’t reached rock bottom just yet, but the declines do appear to have stopped. A local real estate agent taught me to check comparable sales and listing pricing. 

Assuming most properties in your area are roughly the same size, a recent $75k sale and a $90k listing indicate a market that is currently declining. When the situation is reversed, with listings falling below sales, a recovery in the market might be seen.

Exclude Foreclosures

Excluding foreclosure sales from a study of home sales in your area is an important caveat to keep in mind. This is where I first found my alarming statistics. Foreclosure sales accounted for the low 40s and upper 30s property prices. No one would buy your house at such a low price unless you were going through a foreclosure.

Really Think About Refinancing

One thing I’ve decided is that it’s in my best interest to refinance my mortgage. Why? We are currently seeing the lowest interest rates in recorded history. My interest rate is dropping from 6% to 4.25%, which will result in a $100 monthly savings. 

My participation entails no personal cost to me. Like always, there are closing expenses, but instead of forking out the cash now, I’m just “adding” three years to the end of the mortgage and reaping the benefits in lower payments right away. 

Being someone who intends to remain in their home for the foreseeable future, I see no problem with a mortgage that extends over a longer time period. Check out a recent post by one of our authors with advice from you, the readers who asked, Should I refinance my mortgage? for more information about real-world refinance.

My opinion is that you should not give up on your mortgage until you are in dire straits. As opposed to shopping around for a new mortgage, keeping with the one you have offers many more benefits. 

I think you made the proper choice to bury your head in the sand for the time being in regard to your home loan, as the future is probably not as dark as you fear it is and the markets will eventually recover (they always do).

Currently, the housing market is a very divisive topic. In the space below, please share your opinions about the market, its return potential, and the possibility of refinancing. Is it a good idea, in your opinion, to foreclose on your house? Is this a moral course of action?

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