23 July 2012|
Do you owe more money on your home than it's worth? If so, you're not alone. Roughly 11 million homes in the U.S. are underwater—in other words, the amount remaining on the mortgage exceeds the value of the property, sometimes by hundreds of thousands of dollars.
Underwater mortgages can be a big burden on homeowners, draining their financial resources and limiting mobility. So it's hardly surprising that some people with underwater mortgages have reached a seemingly drastic conclusion: It's better to stop paying the mortgage and walk away than to stay in the property. This process is known as strategic default, and it's more common than you might think, though it's not a decision to be made lightly.
First, there's the "moral" issue. Many people feel that it's simply wrong to stop paying their mortgage. And of course, no one wants to be branded a deadbeat. But some experts urge financially strapped borrowers to think about strategic default as a business decision, not a personal one. The reasoning is that your mortgage is a contract, and that if you're willing to accept the penalties for breaking that contract, there's nothing wrong with walking away, provided it makes the most sense for your situation.
Second, before you walk away from an underwater mortgage, you need to think about the financial consequences. The big one is the hit to your credit score, which may drop more than 100 points; a lower score will make it difficult (if not impossible) to get a mortgage or car loan for the next few years. You'll also need to think about the tax consequences of default, deficiency laws in your state (in some places, your lender can come after you for the difference between your mortgage amount and the price at which the home was eventually sold), and your overall financial situation. (For example, will you be able to save money during the period when you're not paying your mortgage, so that you'll be able to rent another home or buy a new car without a loan once the foreclosure is complete?)
Walking away from an underwater mortgage isn't a decision to be made lightly. For some, it may be a smart move, but there may also be other options, such as a loan modification. If you're considering a strategic default, your best bet is to talk to a professional, such as a bankruptcy or real estate attorney, who can help you evaluate your situations and make a decision that works for you.