The Pros & Cons of Walking Away from your Mortgageby Tim Manni
Allow me, if you will, to quote one of America’s great philosophers, Mr. Kenny Rogers: “You gotta know when to hold ‘em, know when to fold ‘em, know when to walk away, know when to run.”
What in the world does Kenny Rogers have to do with mortgages and homeownership? Well, nothing. However, Kenny’s advice is so timeless because of its ability to relate to nearly any tough decision that has its pros and cons. So those words of wisdom aren’t strictly meant for the riverboat gambler, they can also pertain to (here comes the mortgage connection) the millions of underwater homeowners in U.S.: you have to know when to hold onto to what you got, and you have to know when it’s the right time to walk away.
In my feature article on HSH.com, “The Pros and Cons of Walking Away from your Mortgage,” I tried to take a similar approach, offering homeowners several reasons why they should hold onto their homes and several reasons why it may be time to walk away:
Walking away from your home loan shouldn’t be a decision that’s made overnight. Strategic defaults can come with a host of short- and long-term repercussions, including some of which you might not be aware of. There are both pros and cons to walking away from your mortgage, and it’s a good idea for you to be aware of both before you consider a strategic default as the solution to your problem.
What’s the number one reason why a borrower walks away from their home? They’re underwater:
The number one reason borrowers strategically default on their mortgage is because they are underwater. Given the substantial drop in home prices over the last few years, an estimated 25% of all homeowners have negative equity in their homes. According to a recent Federal Reserve study, “the median borrower does not strategically default until equity falls to -62 percent of their home’s value” (e.g. your home is worth $124,000 and the mortgage outstanding is $200,000). Given how far some borrowers’ equity has fallen, the underwater problem will be with us for years to come. Recently HSH.com ran some numbers and determined that a significant portion of borrowers wouldn’t even reach 0% equity until 2015.
On the flip side, the number reason why you shouldn’t walk away from your homes is the damage you can do to your credit:
Walking away from your mortgage is one of the quickest and easiest ways to kill your credit score. Money Magazine says a borrower with a credit score of 780 who decides to walk away will see their score drop by up to 150 points. Given the widespread use of credit scores today, a drop in your credit score could prevent you from getting a new job, renting an apartment and will increase your interest costs now and well into the future.
If you’re thinking about walking away from your mortgage you really need to read “The Pros and Cons of Walking Away from your Mortgage” in its entirety. Even if you aren’t thinking about making this complex decision, you should still give it a read. Just as I wrote in the article’s conclusion, “Our purpose was to really think around the issue of strategic defaults, not advocating for one position or another. While we did tackle a host of considerations, we were hoping you could let us know which considerations we missed.”
We hope to hear from you!