Should You Swim Away From An Underwater Mortgage?

I just read a very good blog post titled “Walking Away from Your Mortgage: Emotion or Logic?” that highlights the moral responsibilities of a homeowner walking away from their home and the financial benefits of doing so.

The article sites a paper written by Brent T. White, a Professor at the University of Arizona about how homeowners tend to stay in their house and continue to make the payments even though they are upside-down on their loans. He states that they often do that instead of foreclosure because of “1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences.”  What is interesting is that these homeowners may be making a financial mistake due to the perception of what others will think of them.

The story goes on to state that those that walk away have been able to save large amounts of money by renting instead of owning. According to Liz Pulliam Weston of MSN.com who disagrees with some of White’s points, there may be some merit in this. While the now previous homeowner will not be able to purchase another home for several years using conventional lending, they also need to understand that this maneuver will certainly damage their credit for several years affecting other aspects of their lives.

One point that I would like to make that is not mentioned in the article is that, at least in my area, there are several options including lease options (aka rent-to-own) where that the family can move into a home for several years as a rental and then purchase it when they are able to secure financing. It is interesting to think that a family could potentially walk away from their home and lease option the house across the street from an investor who bought it as a foreclosure. All while saving them money every month.

An additional point that the article broached is that if more homeowners just walk away from their home, this may cause the lenders to work a little harder at doing the loan modifications. I guess I can see where this may have an effect. The government is ready to start “shaming” the lenders into making more permanent modifications, so why not allow the homeowners to speak with their feet?

The question is, how many will be willing to risk the shame and guilt of foreclosure to attempt this?

Scott

PS. If you or someone you know is in this position, I may be able to help. Not only do I work with a company that will assist with loan modifications, but I have several investors who regularly lease option properties. Feel free to email me at scott@nwiloanguy.com.

PPS. As your trusted mortgage loan adviser, I not only help clients get into a home, I try to keep them there.

About Scott

I am an Indiana mortgage lender with CrossCountry Mortgage, Inc. with an office in Merrillville, IN. I believe that my clients have the right to transparency in the loan process and deserve to get answers and updates in a timely manner. No matter if it is a VA, USDA, FHA, reverse mortgage or conventional loan, I promise to help choose the right product at the right rate. Connect with Scott on google+.

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  3. Should You Swim Away From An Underwater Mortgage? | NW Indiana … | Consolidation Student Loans says:

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  4. [...] First, many homeowners who have purchased in the last several years using high loan-to-value products such as 100%, 102%, 125%, 80-20, etc. loans) have seen their home values go down much faster than their principle has. For them, it is almost impossible to refinance if they own thousands, if not tens of thousands more than the current value. To make it worse, many of them are in adjustable rate products that could cause their payments to increase. For them, walking away may be an option. See previous post. [...]