Monday, September 20, 2010

Is Ditching Your Mortgage An Option?

If you owe more on your mortgage than your house is worth you have an underwater mortgage. What options do you have? Do you give up paying the mortgage and leave the house to foreclosure. 
People look at this problem two ways. First, there are those that think it is unethical and shameful to walk away from an obligation. Secondly, those that think walking away is nothing compared to what the banks have done, making a profit on bad loans and those that gambled on mortgages. 
If we look at it from a strictly economic position. At what point are you so far under that there is no way you will ever be even in the foreseeable future. Not walking away would be the wrong thing to do. If your 50% underwater on a $400,000 home how is not walking away the right thing to do for you financial life. 
If you compare your mortgage payment to the rental payment for the same house, is the rental payment lower than the mortgage payment. If your mortgage payment is $2600 and the rental payment is $1600, what do you do? Then it would make sense to walk away because you would be saving $1000 month. Over ten years that would come to $120,000. If you did this the you would have this money and your credit report would have been cleared of the foreclosure years ago. If you did stay and paid your mortgage, you may have some equity or still may be underwater at the end of ten years. 
Some good news from Moody's , 62% of major metropolitan areas will have their home values return to pre-recession levels by 2016 . But if that is inconceivable to you, some experts say it may take til 2030 or 2040 to return to those levels. 
Still the stigma of being foreclosed on is strong in some people. The discarding of an obligation so big is so negative to people they find it hard to chose that decision. Yet you could, after 7 years have a clean credit report by then and the stigma may have passed. You could purchase a house and start over. What ever choice is made, both options are gut wrenching. 

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