Should I Walk Away from My Mortgage?

For some, the idea of walking away from a mortgage presents quite a moral dilemma. Others feel duty-bound to fulfill their contractual obligation to continue making payments to the lender, regardless of how much (or how little) their home is worth.

Personally, I believe if one has the ability to pay their debts, any debt, they should pay them. This idea doesn’t stop with mortgages. I don’t like voluntary car repossessions or walking away from credit card debt you legitimately owe and can afford to pay.

Think about it. When you signed your signature 27 times the day you took on a mortgage, you accepted some risk that the “investment” you were making would hold its value. The lender made the same calculated risk, and even required you to buy private mortgage insurance if your down payment was small to transfer some of that risk away from them.

Now, there is a difference in someone losing a job, struggling to make their mortgage payment and other obligations, and someone who simply wakes up one morning and decides they are no longer going to pay their bills. Those in the latter category rationalize their decision with sentiments like, “Well, why should I continue to pay for something that is of lesser value than when I bought it?”

Using that same logic, we’d walk away from new car loans, and even credit card debt, because the things we “financed” are not worth nearly the same value now as when purchased new. Besides the question of ethics, walking away from your mortgage, or any debt, can have serious financial consequences.

Damage to Your Credit

If you simply walk away from your mortgage, you credit will take a hit. If your credit is already shot, you may not care. If you are of the opinion, what’s a good credit score good for anyway, then you may not care.

If you recognize that maintaining a good credit score is a necessary evil in today’s society because insurers, employers and lenders check scores when making offers, you might consider damage to your credit score a negative consequence of walking away from a mortgage.

Apart from the hit to your FICO score, walking away from your mortgage could also present legal issues. Walking away from any debt means the lender is free to foreclose (or repossess) the item you financed and sell it at whatever value the market brings. For foreclosed properties, that usually means a big discount.

If the amount the property sells for isn’t enough to clear the debt owed against it, guess who the bank can legally come after? That’s right, you. So “walking away” doesn’t necessarily mean you are off the hook.

Alternatives to Walking Away from a Mortgage

Workout payments. If you are legitimately in trouble, for whatever reason, and are unable to make your mortgage payment, attempt to work with the lender. Most mortgage issuers are preparing for a higher rate of foreclosures in the near future, which could mean big losses for them. They’d much rather have customers continue to stay in the home and make payments.

Short sell. If you do decide to sell, discuss the option of a short sell with your lender. Basically a short sell means selling the property for less than is owed, at a mutually agreed to price amongst buyers, sellers and the current lender. Be sure to negotiate a sale without recourse – meaning the bank cannot come after you for the balance of the loan (as described above).

Do nothing. If your mortgage is underwater, meaning you owe more on your home than it is worth, but you are able to continue making payments, then the most attractive option may be to do nothing. Stay put. Hope that the economy comes around in the next few years and your value comes back. In time, by continuing to make payments, you will eventually reach a point where your house is no longer underwater.

The Housing Bubble Lessons Learned

I lived in rentals growing up because my mom could never afford a down payment on a home. Until just recently, my family leased a house until we were debt free. During that time as a renter, all I ever heard from others was that we were making such a mistake by not buying a home. A home was a fantastic investment. Renting was like throwing money away.

Well, I wonder how many of those same people still believe that. A home can be a good investment, but mostly it’s just shelter to keep you and yours warm and dry. That’s all it is. And it doesn’t matter if you pay a mortgage company or a landlord to keep that shelter.

Of course, you may have more freedoms owning real estate, but you have more responsibilities, too. There are pros and cons to virtually every financial decision we make, so do what works best for your situation. Whatever you do, avoid buying real estate until you are on a solid financial foundation and avoid viewing it as a significant investment. After all, we’ve seen how quickly that “investment” in real estate can drop.

Comments

  1. I agree that people should not walk away from their debts.

    That said, I also believe that the moral issue here is complicated by the moral failings of those who promoted the bubbles in the housing and stock markets. Those people were in positions of higher responsibility and they have enjoyed huge financial gains as a result of their promotion of the bubbles. I have a hard time saying that it is justice to insist that the victims of the bubbles pay all their debts while the promotors of them walk away scott-free.

    A free market economy cannot function without trust and at least some minimal standards of integrity. That’s the bottom line. I believe that we need a national debate on the true causes of the economic crisis and that we need to form a new social compact that will govern our behavior in these matters in future days. I don’t believe that our economic and political systems can continue to function effectively unless serious steps are taken to reestablish public trust in our economic and political institutions.

    I think that we should expect people to honor their debts in the new environment. I am not sure that it is realistic to expect most people to continue to honor their debts in the existing environment. Things have gone too far to expect people under financial strain to do the right thing in these sorts of circumstances. Those that do are doing the right thing and should be honored, in my view. But I do not personally expect most to continue to honor their financial obligations as the crisis worsens.

    I believe that our free market economy will survive but I think it is fair to say that it is today under serious stress. People will have to decide whether they view it as worth saving or not. My vote is very much that it is worth saving.

    Rob

    • No bank ever held a customer at gun point and forced them to buy a house or to overpay for a house. Why does a bank have a higher responsibility? If house prices continued to rise, it is not like you would have given the excess income you made back to the bank or to the person you purchased from, why shoudl they take the hit if the value goes down? Personal greed on the part of the customer led them to buy the house, and the banks loaned you money for it that YOU agreed to pay back at an AGREED TO interest rate. Last time I checked, in order to buy a house you needed to be a legal adult who understood what you signed. Just because you made a bad decision and a stupid one (no way would house prices be able to continue to grow at that rate), why do you now blame the bank you borrowed from? Your house being worth less than you paid is not a crisis, it is a result of you overpaying and now consumers are realizing that they will not pay what you did for your house. How is that the bank’s fault? They allowed you to do exactly what you wanted to do, pay way too much for a house, possibly at a low down payment. Why should the bank take the hit for your bad decision when you signed something agreeing to pay them back?

      I agree that if you are unable to pay your debts legitimately, it makes sense to walk away from your mortgage. This is not what the article was about, it is about not paying back your debt when you could, but you don’t want to because you are underwater.

      • Well Kat I would take a different view, I would say there are was alot of greed from the banks and proper checks of customers income etc etc.
        I myself purchased in the height of the market and put down a 90,000 deposit on a house which is now in negative equity. Does that make me greedy and wanting a better home for me and my family.

        Thanks to Mr Cameron, the banks created the situation and yes they had a higher responsibility than the consumer. Where does Cameron put the money into again the BANKS!!!! i REST MY CASE

  2. These people that walk away from their mortgage and can afford it drive me insane. I think almost everyone has made a bad investment in their life (stocks, cars, whatever). If we all just had the ability to walk away, where would our country be?

    It is a combination of a lack of integrity by some, and a system that has been set up so full of loopholes that allows people to get away with it. I have heard that justification countless times ‘well the system lets me do it, so it must not be wrong’. Well, in my opinion it is wrong. It also isn’t fair to your poor neighbors that have to look at your underwater house now be unattended and an eye-sore.

    Personally, I could never do it, unless we were in financial hardship. However, I made sure we could afford this house before we moved in. We put down a healthy amount of money for a down payment and we also didn’t go all crazy and buy the maximum amount of house we were approved for like so many do. Sure our house is worth less than we bought it for. But we also have a good amount of equity because we went with a 15 year mortgage.

    We need some major reform in this country!

  3. A home (not investment real estate) is not an investment. It’s a place to live, a roof over ones head and certainly not an asset. It’s wrong to walk from any debt, period.

  4. So if they walk away from the mortgage (paying money out every month for a roof over their heads), then what are they going to do for housing? – they are going to pay RENT – “Pay money out every month for a roof over their heads.”

    They exchange one payment for another…. The mortgaged house HAS a chance of recovering it’s value (if they look at it as an “investment” – which I do not)…. but the RENT payment is just throwing money down the drain with no hope of ever seeing that money again…..

    Either way they have to pay money out every month…..
    Why throw the money completely away every month (rent) when there is the chance to recover some of it – eventually – in the mortgage payment….

    And with the mortgage – whether or not the house held it’s value – at SOME point in time it will be paid off – and then, what difference does it make what the value is – it is paid for and that’s they end of mortgage or rent payments forever…..

    And for those that are going to bring up taxes….my house is paid for – my taxes are under $800/year for a nice totally remodeled to new condition 1035 sq ft home – perfect for my retirement…. I’m paying $67/month for taxes….. Try renting for that!

    Morals? Every one has their own conscience and has to live with their decisions. For most of us it is morally wrong to walk from any debt – altho in some severe financial circumstances they lose the home even tho they try to make it work. I can’t judge others – for me, it would be morally wrong.

  5. A contract is a contract, no matter how big the debt is, nor if you have negative equity.

    Now, if it’s jeopardizing your family’s health, then yeah… but even then you should try to extend the length of the mortgage to get a lower payment so you could afford it!

    They call the group of people that can afford to pay their mortgage, but instead choose to walk away from it, “Strategic Defaulters“. The mortgage companies are starting to wise up though! The are starting to go after “Strategic Defaulters” with lawsuits. So if you are thinking of going this route, be aware of the consequences in your area!

    • If the state is a non recourse state, like California and Nevada, then it is just a business decision to walk away from an upside down mortgage. The loan paperwork said to the effect, pay the mortgage or surrender your house to the mortgage holder. That is what people are doing. Walking away and renting untill prices adjust downwards. I am glad I don’t have to deal with the housing mess as I am not selling my house in the near future.

  6. This topic hits especially close to home because my house is currently $170,000 underwater. The amazing thing is that we actually bought our house on short sale when the bubble was starting to leak. The burst is what pushed us underwater.

    If we walked away, we’d be saving thousands per month. And I could go on about the moral obligation of walking away, but it’s the financial perspective that doesn’t make sense to me.

    I put a twenty percent down payment that I can’t get back. Then, I walk away from my home and blast my credit to smithereens for seven years. Isn’t this the epitome of the foolish buy-high-sell-low? Then, when my credit is back to good, I start looking at houses again. But who’s to say that housing prices won’t be rising again by then anyway? America is ever engaged in the bust-boom cycle.

    I’d rather take my chances staying put. The worst that can happen (assuming we can make our mortgage payment) is that I stay in one home for the rest of my life. Doesn’t sound like such a bad fate to me.

  7. Bank of America has bought many commercial properties and “walked away” when it was to their financial advantage. I don’t see how it is a “moral” obligation for a small time borrower to always pay their mortgage when the financial institutions don’t. I think the lenders are happy that it’s been labeled a moral obligation. Lastly, my contract states that that mortgage holder gets my house if I don’t pay so how is it that I’m not living up to the contract if I walk away – they are getting the house (I’m not walking away and keeping the house).

  8. I actually told someone who wanted to buy a condo to hold off and wait til the market cools a little (about a year before the bubble burst). The response was “I have to buy this now before it goes up even more.” A year later, they unfortunately had to file bankruptcy due to a job loss.

    I think what’s tough is that home buying is often a very emotional decision. I could’ve told that person the bubble was going to burst til I was blue in the face, but home ownership represented many things. Stability, security, growing up..standing on one’s own two feet.

    Some of these strategic defaults might be emotional. LOTS of people bought houses thinking they were going to gain $100K in equity in a few years. When that didn’t happen, their dream became a nightmare. I’ve seen people walk away because their home is a daily reminder of a bad decision that they can’t take back and just can’t deal with facing it every day. It’s like their home is calling out HELLO LOSER every time they walk up to their doorstep.

    I still think it’s absolutely wrong, and can’t imagine myself in that situation unless I had serious health issues. However, I’ve seen how emotions can trump ethics when a person comes home miserable and can’t adjust their perspective.

  9. Walking away from a mortgage when you can still pay it but don’t want to is like getting a divorce when you have kids because you argue a lot.

    I believe both are wrong and weak of any person to do.

  10. Or you can move out to a small / cheap apartment and rent your home out to someone and have that money go to paying the mortgage.

  11. I concur with many of the comments. Purchasing a home requires maturity, a past history/demonstration of responsibility as well as sufficient funds to make the payments over the long haul.

    Buying a home is a “priviledge” and not a right!!! And that is EXACTLY how many individuals have found themselves in a financial mess. Many have felt they were “owed” a house because they grew up in a nice fancy home is a manicured & safe neighborhood. Guess what? Your parents probably worked for YEARS to get the the point where they had saved & scrimped to buy a home you enjoyed! So many people miss that part of the equation. Everyone has to sacrafice at some point (as few of us have it handed to us). There are some that were unwilling to sacrafice, they wanted a house & they wanted it now & doggone it they were going to get it, regardless of what might be lurking down the road.

    The sense of entitlement is rampant in America and I think it is this plague that has gotten so many into financial quicksand.

    • Very interesting article. Nice how the one guy has decided to walk away from his home so he can afford new furniture and a vacation. And the other family has been in their house or 15 years and have a crummy interest rate? By what standard? Tne years ago 8% was very good, today it sinks, but that’s relative. My folks bought their house in the 1980s where rates were 14%! And in this article the lady says they “can’t afford their payment” but never says why. Job loss, interest rate adjusting up in an ARM? Pretty poor excuse, and pretty poor journalism for covering only 1/2 the story.

      Seriously, THESE are the the lessons we’ve learned? If these two families are typical of Americans today we’ve learned nothing but how to rationalize our self-interest at the expense of others. I do applaud the article mentioning how walk-aways are hurting their neighbors. At least that puts a face on one of the parties suffereing from these strategic defaulters. I prefer to call them deadbeat liars.

      On the bright side, as a land lord I can now rent to these people who have money but little sense of obligation. Of course, they’re going to pay a hefty security deposit (double or triple what I’d normally ask) since they’ve proved they have few scruples. So the “strategy” is turning around to bite them in the butt…as it should.

  12. Of course, you may have more freedoms owning real estate, but you have more responsibilities, too. There are pros and cons to virtually every financial decision we make, so do what works best for your situation.

    Precisely.
    I can also empathize with what Rob says, although the responsibility still falls on the individual, since as individuals it is our responsibility to CHOOSE to do business with companies we trust and feel comfortable with. There will always be players… but that doesn’t mean we have to sign up for a $200,000 debt with them.

  13. Hi. I will let my recent article on this subject speak for me here:

    http://worthwild.net/blog/?p=145

    Suffice it to say that I think the issue is complex. I believe our public officials and bank CEOs have conspired to create an ungodly mess and now they want to ride it out on the backs of the middle class.

    I am aware that I have a controversial opinion.

    Thanks!

    -WR

  14. We bought into the “buy now, don’t waste money on rent” mentality of 5 years ago! Biggest mistake of our life. An 80/20 loan, job relocation, second home signed for prior to closing the sale of the first and then that contract falling through….left us in a world of hurt!

    Thankfully, fabulous renters and good jobs help us meet the mortgages of two houses. Even having just paid off the 20% on the first home, we are still upside down and without options unless we want to walk away. So, we’ll keep chipping away at it until we can qualify for a re-fi.

    It hurts to see that money go flying out the door every month. But the lessons our family has learned about buckling down have been invaluable. We’ll never be that stupid again and we’ve stopped acting like we’re rich – cuz, we’re not.
    It’s hard, but it’s the right thing to do. Thanks for your post.

  15. Leaving your debts unpaid only raises the opportunity cost for risk. The market will have a way to stop your ability to gain credit and it will favour those that have good credit. The only problem is that it’s not fully on par.

  16. How is any government lender going to know that your walk-away was voluntary as opposed to due to circumstances beyond your control like medical debt?

    Any applicant can tell them a previous foreclosure was due to medical bills and the lender has no recourse but to take them at their word – they can’t legally demand to see medical records!

  17. I have been reading these comments and i am still not sure as to what i should do in my current situation. I bought my house from my ex fiances parents. I spoke to her father in depth about the condition of the house and he told me that what i see is all that is wrong with the house. For example painting, some minor plumbing, and eventually exterior painting. On good faith and a tremendous amount of immaturity and inexperience i bought the house. The bank did not require an inspection and i have found there to be a tremendous amount of issues with this house. The furnace was from the 60′s and does not work, the roof has 5 holes in it and needs replacing, the plumbing is shot, and the electricity is WAY passed it time to be updated and causes me to lay awake at night planning escape routes for me and my children in case of a fire. I am on time with my mortgage payments but they will not work with me to get the money to fix this house. I spoke to a real estate agent to try to see if i could sell it and she told me i wouldnt get much because the house is not considered “liveable” and a bank would not mortgage it. Well the bank mortgaged it for me. I am seruously considering walking away from my mortgage because this house is not fit for my children and it was not what i signed a contract for. I bought a house not pieces of a house.

  18. 90% of the posts here speak to “moral obligations” and have personalized this situation to the point of a handshake deal. Unfortunately, we are not “shaking hands” with another person of similar moral character. We have all shaken the hands of big banking – which is about as far away from a moral person as one could get. “Boxofapples” got it correct in an earlier post. Banks (among other lending institutions) purchase much larger commercial properties at a much higher dollar amount than any of our homes, and they walk away from those deals all the time. I know, I am a commercial broker and see it all the time. So…let’s compare apples to apples here. If the person on the other side of the contract has the same moral belief structure that you share, then you can make the “moral argument” all day long and it would hold water. Not in this case I’m affraid. The lenders are out to make money and they could care less about you, your family, and whatever reasons you have to not pay. Why should you care so much about them? Get over yourselves and make the decesion that is right for you and your family – not the bank!

    • Thanks lead by example! I have paid my mortgage faithfully for 15 yrs. and still have a few yrs left to go, but the neighborhood has gone to the dogs…literally. Drugs and careless renters surround me, and my good neighbors that were there when the crime rate was low have moved out and lowered the value of my home. I’m constantly worried about getting broken into for the third time or getting shot or raped in my own driveway. My car insurance, home insurance, etc. are the highest in the state and utility bills are ridiculous. My children are grown, gone and doing well so I don’t want them anywhere near here. Is this supposed to be the american dream… risk my life for the financial obligation i made 15 yrs. ago? I think not. Banks dont do it when they walk away from commercial deals so why should I? I’m not saying its the banks fault, but mean time I value my life more than bad credit or any bank loan.

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