Even with real estate prices and sales seemingly on the rebound, there are still struggling homeowners who are thinking about handing over the keys and walking away from their house. For people who can't afford their house payments and are digging a deeper hole every day by staying put, this can be a fairly easy decision. But even for those who can afford their payments, the thought of making payments for years and still being underwater, may leave them feeling hopeless and looking for better options.
It's a tough choice, but some people will have to walk away from their homes. Others won't. Find out which factors are likely to make the difference. (For tips on how to avoid giving up your home, see Saving Your Home From Foreclosure.)
Ability to Pay
If homeowners can't afford you payment, before walking away, they should consider how long this condition will last. For those with an adjustable rate loan that has increased beyond their ability to pay, without the ability to refinance, they may have to give in and walk out. According to Credit Suisse, this is a scenario that may be hitting a lot of homeowners over the next few years; they estimate that about $4 billion worth of mortgage assets will reset in March 2010, and that this number will rise to a peak of $14 billion by September 2011. Using a credit card or other debt to make payments is only a temporary solution - and one with disastrous consequences. Long-term negative cash flow means eventual collapse.
For homeowners who have lost their jobs and or are suffering from a relative lack of income for other reasons, as is the case with many people working on commission, this is a condition that may change in the future. For such people, it's possible that some short-term budgetary adjustments, short-term loans from family or friends (not from credit cards), and a dramatic reduction in spending, might get them through.
The Cost of Walking Away
Is it financially smart to walk away? On the downside, anyone who decides to let the bank foreclose will take a significant credit hit. This has long-term consequences, although credit can be repaired over time. What is key is that some states allow mortgage firms to pursue other assets. For anyone who is considering walking away from a mortgage, it is important to check state laws - they could be walking away from much more than a house.
The Benefit of Making a Clean Break
There are also some big upsides to walking away from what is ultimately an unaffordable mortgage. Monthly expenses should decrease dramatically, making the possibility of saving money for the future, and paying off other debts, a more likely possibility. Also, leaving mortgage debt behind means removing a major negative asset from a struggling family's balance sheet.
Is it right to walk away if you don't have to? No one likes the idea of not living up to their obligations, but regardless of how the situation evolved, if you own a house, you signed a contract and made a promise to make the payments. While contracts are broken every day, most people feel a responsibility to honor that obligation, even if it's not in their own financial interest.
However, with all of the foreclosures these days, the stigma has lessened and the impact may be less as well. According to RealtyTrac, foreclosure rates rose by 5.4% in the third quarter of 2009 compared to the previous quarter. They were up 22.5% from the same quarter in 2008. As a result, while it used to be very difficult for someone with a foreclosure to rent an apartment, anecdotal evidence suggests that this is becoming less of a problem. Also, there are obligations beyond a mortgage contract, to children for example. Maybe it's important to continue to fund an child's education from an apartment rather than to saddle them with college loans from a house.
Clearly, part of this predicament is a moral and ethical issue for many people. While financial decisions often seem like they are about numbers, a home is much more than that to many people, and letting it go can be a very difficult choice.