Walking Away from a Bad Mortgage?
There has been a lot in the news lately about strategic defaults on home loans. Even some of Hollywood’s rich and famous have been entering foreclosure on one or more properties. Some people are even advising these defaults as a smart way to get out from under a mortgage that is worth more than your home is.
Here’s what’s happening. A few years ago, before home prices began falling, people were buying homes at a higher price and with higher values. They moved in, got settled, and began enjoying the joys of home ownership, knowing that they had just made a great investment for their future.
Fast forward to today. The home that sold for $300,000 is now worth $250,000 or less. Five years of mortgage payments has only brought the total amount still due (the principle) down to $275,000. Remember that the majority of your mortgage payments, especially in the first several years, go towards interest, not the actual cost of the home. Now the home is worth $25,000 less than the owners now own on it. They’re great investment is actually losing them money.
This is the point where having a positive mindset can save you a lot of stress and worry, because there are two ways of approaching this issue.
One- Home values are constantly in fluctuation. They go up for a while, and then they go back down (although not usually as far as they’ve recently fallen). If you can wait it out, the price of the home will go back up above what you paid for it. It’s going to take some time, but it will happen. Consider this a lull in prices, and move on. It’s not going to affect whether or not can enjoy living in the home. It’s the same place you bought, and loved, a few years ago. The home hasn’t changed at all. Just sit back and wait for the prices to turn around.
Two- Realize that you are currently paying more for your home than it is worth, and panic. This is what a lot of people seem to be doing. If you need to sell, it’s entirely understandable that this is a worrisome problem. You’re probably losing thousands of dollars on the sale. On the other hand, if you are buying another home, you’re probably getting it for several thousand dollars lower than what the seller originally paid for it, so it kind of evens out.
The problem with strategic defaults is that they aren’t the perfect solution everyone sees them as. Your credit score takes a serious beating, one that will probably take five or more years to recover from. Even though there is very little that lenders can do to get compensated beyond taking back the home, there is still the morality aspect to consider. Everyone in real estate, from home owners all the way through national finance departments, are feeling a pinch right now. Strategic defaults are going to make the whole problem even harder to solve.
Walking away from a bad mortgage is a bad idea. The financial repercussions can last up to seven years, limiting your ability to get funding for a new home, car or other big purchase. If you can, try to refinances and take advantage of lower interest rates to make up part of the difference. Even if that is not an option, keep in mind that the low home values are a temporary problem, one that will be solved a lot faster if you don’t try a strategic foreclosure on your home.