Walking away from Mortgage

Darryl Bachmeier
Aug 18, 2020

If your mortgage is higher than the actual value of the house, what should you do? Should you wait for the house to increase in value or should you consider a strategic foreclosure? A mortgage loan that is more than the current value of the house is called an underwater mortgage. In this case the amount you owe will be greater than the actual price of the house. It is also referred to as negative equity of the homeowner. So what should you do in the case of an underwater mortgage?

Determine whether you loan is underwater or not

The first part of the process is to find out the difference between the house price and the loan amounts owed. For example if your total loan owed stands at $225,000 while the price of your house is $ 200,000 your loan would be considered an underwater mortgage. Once a loan is considered underwater a homeowner primarily has three options on the loan:

Stay at your home and keep making the mortgage payments

While your house may not be valued high presently real estate trends don’t ever remain the same. At this point, it is also wise to read up of on your area’s real estate forecast and estimate the price in the future. It could be that this is a minor blip and real estate prices might rebound in the future. Furthermore, there are also considerations that you might have to make. Changing a home is always an arduous task and the problems compound when you have a family. It is possible that your locality has good schools and a good environment for your family which could be an important consideration for your family.

Consider altering the terms of the mortgage

You could also ask your lender to change the terms of your loan through a principle reduction or a change in the payment schedule of your loan installments. Lenders might be willing to lower their loan amount if they realize that the loan is currently underwater and the borrower is under pressure to make payments. They might lower the overall principal amount in this case which would reduce the risk of a foreclosure. Another way would be to change your payments schedule on your mortgage. You could talk to your lender about whether the payment terms could be altered to avoid the risk of foreclosure. Lenders can then change the payment terms by reducing the interest payment or by extending the loan period to a longer term.

Sell your house or get rid of it

There are times when walking out of the mortgage is a wise option. It is possible that you house price is unlikely to increase in the long-term and it would be foolish to make mortgage payments. One of the options that a homeowner has is to go for a short sale of the house. A short sale is when the lender agrees to accept a payoff amount which is typically less than the amount owed to forgive the loan. However a short sale is complex and can take a long time so the lender might be hesitant however, an experienced agent might be able to simplify the process. Another possible option is to go for a foreclosure. A foreclosure happens when the borrower signs off the deed the owner which results in the borrower getting out of the mortgage without any obligations. A foreclosure can be nerve wracking and stressful for any lender. Furthermore, a foreclosure can also affect your credit score which can negatively impact you if you want to purchase a home later.

Go for a strategic default

Finally, when you have exhausted all options and there seems to be nothing in the offing, you could go for a strategic default. After you have realized you made a poor investment decision when you purchased the home, you may eventually stop making mortgage payments and default on the loan. A strategic default however can have harmful impact on your financial future. It could result in a poor credit score which means getting the next credit card or getting a new mortgage would be tougher. Even if you are able to get credit, you will have to pay an exorbitant amount of interest and fees for them. Furthermore, some lenders might actually come up later to collect the debt owed after a foreclosure sale. The amount could depend on the amount owed or the financial condition of the borrower. A house purchase is generally one of the biggest financial decision you take in your life. It is important to make that decision wisely by consulting an experienced financial advisor. However, if the decision turns out to be wrong it is important to evaluate the options and make a wise decision

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