Should I Walk Away from My Mortgage?

It is an excruciating choice many Americans are now facing. Is it worth it to continue paying the mortgage, or is it better to just walk away? The once unthinkable prospect of abandoning one's own home is now a prospect many are pondering. There are two components to this dilemma. The first is philosophical in nature and relates to ethics and morality. Many believe a deal is a deal, and walking away constitutes abrogation of one's word. Others view it as a business transaction with this outcome being a risk the lender assumed volitionally and with great profit motive. A rational case can be made for either side of this argument, and in the end moral judgment devolves to the individual.

Ethics aside, many want to know the hard facts surrounding the benefits and ramifications of turning over the keys to your lender. The most obvious benefit is escape from an oppressive mortgage payment. If you were easily able to service the payment, then you wouldn't be considering this measure. Today, most likely a high payment arose from an adjustable rate. You could afford the initial payment, but now it is just too much. Unable to sell your house for anywhere near the current mortgage balance you feel stuck. Walking away it is often possible to rent a comparable property to the one you are leaving at a fraction of the cost.

The aversion to renting becomes much more palatable seeing your current ownership situation is not resulting in any equity either. If anything, it is the opposite if you are in a declining market. It can be very possible you are paying a mortgage each month while the amount of your equity plummets. Some markets may not see the valuations attained at the peak of the housing heyday again during our lifetimes. In this scenario, the equity which home ownership represents becomes illusory. Add to that the burden of rising local property taxes and the prospect of walking away can become even more alluring.

Even more appealing is the prospect of getting to keep your house and have the mortgage erased. This is a long shot, but it can happen. Many lenders are having difficulty satisfying the court's demand for full chain of title. This relates to the complex CMO arrangements in which many mortgages now reside. There is a story of a gentlemen in Florida with a very expensive house who has avoided foreclosure for over a year by just showing up in court and contesting chain of title. Again, morality aside, many of those in desperate straits today will employ any option, if only to obtain months of free rent.

With the benefits being clear for getting a large monkey off your back, what are the ramifications? The first obvious one is credit. Mortgage defaults wreak havoc on your FICO score, and you must be prepared for the adverse credit consequences. One should assume a ten year horizon and sit down and calculate all credit needs during that timeframe. How many cars will you own or lease? Buying another home could prove difficult, however coming out of your current situation it might be better to be a renter and fully recover before diving back into home ownership. Between vehicles, credit cards, and other potential sources of credit, how much additional will it cost you over the next ten years via higher interest rates? This mathematical calculation can be compared against your savings accrued by walking away to put in perspective the economic balance sheet.

One potential ramification to consider is what is termed a deficiency balance. Assume you have a mortgage balance of $300,000 and you walk away. Your lender forecloses on the property and only receives $200,000 net all the various costs. Theoretically, they could pursue you for the additional $100,000 they are out. Practically, this has not happened on a widespread basis. As indicated, many lenders are having trouble enough just obtaining judgment on the foreclosure itself. Obtaining a deficiency judgment is even more difficult. However, it is possible. Your exposure to a deficiency judgment varies by state.

If you are facing this decision, it might prove wise to get basic information about mortgage deficiency pursuit in your locality. Often, there are free legal resources through local law schools or community programs where you can obtain this information. Additionally, there is anecdotal evidence that some banks are taking advantage of fine print in the underlying agreement which allows them to offset loss by taking funds in other deposit accounts. Consequently, you are well served to play it save by transferring any checking, savings, or CD accounts you may have at the same bank who holds your mortgage.

Every situation is unique, and often many other factors can enter into the equation. In the coming future, more and more families are going to face this tough decision as adjustable rates continue to relentlessly reset. The decision is both an ethical and an economic one. It is not a decision to be made lightly, nor done without all the requisite information. Seek out expert advice and the legal resources available to you in your community. Whichever decision you make you can know that you are not alone and many others are facing the same nightmare.