Don’t Walk Away from Your Mortgage
06/13/2011 10:11 am EST
Even if your house is now worth less than your loan, there are several good reasons not to default...especially if you want to buy another house in the future, get a new job, or even insure your car, writes MoneyShow’s personal finance expert, Terry Savage.
Also, stay tuned tomorrow, June 14, as Ms. Savage takes a deeper look at the mortgage mess that has put millions of Americans in a dangerous situation.
Terry, please answer this question for me: Why shouldn’t I just walk away from my mortgage?
I’m underwater, like millions of others. Why should I keep making payments on a loan that is larger than my house will ever be worth? I know I can rent a house and pay a lot less every month, and save the difference to buy another house one day.
Well, first I’m assuming you want a financial answer—not a moral one. But I can’t resist mentioning that you made a deal, agreed to the loan, and you have a certain responsibility to repay that loan.
And no matter what you may think about the bank or lender’s actions, no one forced you into that deal. If it had been profitable, you wouldn’t be considering “walking away.”
If you do walk away, you’ll have that on your conscience —and you’ll be sending a terrible signal to your children (assuming they are old enough to understand what’s happening) about personal responsibility.
Now, beyond that, I can give you several reasons to re-think the idea of just “walking away” from your mortgage.
First, it will ruin your credit. You can be sure that your mortgage default will appear on your credit report—and it will stay there for at least 7 years. That means it won’t be so easy to buy that next, cheaper home that’s in your plan.
A low credit score means you’ll pay a lot more interest on many other purchases, such as car or a car lease. And it means you’ll pay more for auto insurance, or even life insurance.
Also, if you’re ever looking for a job, you can be sure that prospective employers will pull a credit report and see a foreclosure. Plus, you can be sure that before anyone will rent property to you, they’ll also pull a credit report. They may not consider you a suitable renter.
So, if you decide to walk away from your home it will have a significant impact on your finances and job prospects—and your ability to find a place to live.
From the tone of your question, I’m not sure you’ve considered all the consequences.
And it’s not as simple as just not making mortgage payments. Yes, you may continue living in your home for a number of months, while the foreclosure process takes place. Foreclosure is an ugly (and very public) process, and it will put your entire family under pressure.
Then, depending on your state of residence, the lender can also pursue you for the difference between the mortgage loan and the price they get when they eventually sell your home. It’s called a default judgment. And it means they could garnish your wages, your bank account, and could put a lien on other property you own.
Now, I well understand that you’re angry at being “stuck” making payments on a home that is worth far less than your loan. But take a second look at your situation. It’s still the same home that you thought was worth the money when you purchased it! Your family is still living there, and you can afford the payments, according to your question.
Don’t take it out on the house—or your family—that the financial markets changed course. Think of it this way: If you had purchased a stock and sold it at a loss, you could never get the money back. At least with your home, you can live in it while you wait for the market to rebound.
If you get out of the housing market now, in such an ugly way, you may never get back on track to home ownership. And that’s something you’re likely to regret down the line. Yes, it’s taking a long time for the housing market to come back—but eventually it will.
Right now you feel like a sucker to keep paying on your mortgage. But the real sucker move is to dump out now—and foreclose your future chances at home ownership.
It’s one thing to face foreclosure if you’ve lost your job and simply can’t pay. That’s a tragedy that many families are facing. But if you can possibly make it work, stick with your home.
Down the road, you’ll be glad you did. And that’s The Savage Truth.