Before you decide to walk away from your mortgage, consider the real, long-term costs.
With over eleven million Americans owing more than their houses are worth, it's no surprise that many homeowners are considering walking away from their mortgages. It's especially tempting if you are out of a job or experiencing other financial difficulties and struggling to make bloated monthly payments.
With so many people in trouble, even the social stigma of ditching your financial commitments isn't as great as it once was.
Some financial experts (and not shady ones) are even suggesting that some homeowners walk away from their mortgages - an action called strategic default.
Before you even consider defaulting on your mortgage, though, you should think about the real long-term costs and whether or not they are worth it.
Here's a rundown of the top three things to consider:
1) Credit Issues: You probably already knew this, but your credit score is going to take a huge hit.
Sometimes, it can drop as much as 300-400 points. A bad credit score can make it hard to get a job (some employers are taking credit into consideration), a new apartment, and can make for much higher costs on a future mortgage.
Also, it takes seven years for a foreclosure to disappear from your credit check completely, which can mean a total freeze out by the mortgage industry. In other words, forget about buying another house for seven years.
In many cases, credit card companies will cancel your cards or lower your credit limit as a result of missed mortgage payments
2) Deficiency Risks: in some states, the lender can sue you for the difference in the amount that was owed and the foreclosure or short sale amount. In other words, if you walk out on your mortgage and the bank gets a fraction of the value of the house, they can sue you for the difference.
You can even be affected in some states that do not have Anti-Deficiency laws. In other words, always seek legal advice.
3) Rental Difficulties: While the point of walking away from your mortgage is likely to lower your monthly costs with a cheaper place, it might not be so easy to just drop everything and rent an apartment.
First of all, many landlords will not immediately want to rent to someone who has the red flag of not making mortgage payments on their credit report. Plus, you have all of the expenses that come from moving and getting rid of your old stuff or storing it. Moving family members further away from school and work is another consideration.
After all of this, are you really saving any money?
Your first line of defense, before walking away from your mortgage, should be to try and find a way to work things out with your lender. After all, they don't want you to default on your loan any more than you do. If you tell them that you are serious about walking away, they are will likely be motivated to make a deal with you.
Then again, if you owe $600,000 on a house that is now worth only $150,000 in a non-recourse state and you are having trouble making your payments-well, maybe the choice isn't so hard to make!