Walking Away From a Home Mortgage - A Rising Trend?

Walking away from a home is the last thing people think about when they actually buy the home. After all, few people consider the worst-case scenario when making a purchase decision. That's just human nature. But these days, in the wake of our economic meltdown, many American homeowners are struggling with this very decision:

Should I walk away from my mortgage loan and accept foreclosure? Is walking away from my home the only option I have left?

In some cases, the answer may actually be yes. Homeowners in certain situations have few other options but to walk away from the home, and this will likely become a rising trend in the coming months.

How does it come to this? How does a homeowner wake up one day and find they have no other options, aside from walking away from the mortgage? Here's the typical scenario:

A couple of years ago, John and Jane actually had some equity in their home. They owed less on their mortgage than the home was worth, so they had some degree of ownership. Then came the subprime mortgage crisis, which was followed by a full-scale economic meltdown. The value of John and Jane's home dropped like a rock, and today they find themselves upside down in the mortgage -- meaning they owe more than the home is worth in the current market.

John and Jane have been watching the news, and they realize that there are some really low interest rates being offered these days. But they cannot refinance because they are significantly upside down in their mortgage. Then things get even worse for the couple. John, the primary breadwinner, loses his job -- another casualty of our troubled economy. Now they are in a situation where they must sell the home, but doing so would not cover the balance of their mortgage, and they cannot afford to make up the difference out of pocket.

It's been called the "perfect storm" for homeowners. Home values drop, jobs are lost, and many people are unable to sell or refinance. Unfortunately, this kind of predicament is all too common right now. Nationwide, nearly 20% of homeowners are upside down in their mortgage loans. In some of the hardest hit cities, like many in Southern California, the percentage of upside down homeowners exceeds 60%. This is why so many people are thinking of walking away from their home mortgages.

Those who have kept their employment status and have no reason to move are in a much better position. They can simply stay in their homes. Their property value may never return to the level it was when they bought the home. But at least they're not in dire straits. They can stay put and hope the housing market recovers enough to boost their equity.

But for the millions of Americans who must sell -- due to job loss or other reasons -- the question of whether or not to walk away becomes more pressing.

When to Walk Away from a Mortgage

From a purely financial standpoint, it seems like an easy decision. When you have no other viable alternatives, walking away from a mortgage (and accepting foreclosure) becomes the only option. But for many homeowners, it's more complex than that. Many people are simply not willing to accept such a loss, so they hang on. And then there's the attachment people have to their homes, which only complicates things further.

CNN Money recently published a collection of stories from real people in this very situation. The homeowners in this article were split in their decisions. One was prepared to walk away, two were against it, and two more will still trying to decide.

So what do the financial experts have to say on this subject. When is walking away from a home the right decision? In truth, only the homeowner can answer this question. And we are in no position to advise you one way or the other. But it might be helpful to hear different people weigh in on this subject, so we have gathered some expert insight for you below:

• In this article by Liz Pulliam Weston (MSN Money), there are three questions you should ask yourself before walking away from your mortgage loan.
• This story from NPR echoes the idea that, in certain scenarios, it makes sense to walk away from a home "especially for homeowners who find themselves upside down."
• Let's hop over to an article by ABC News, in which the authors remind us that a foreclosure can do serious and long-lasting harm to your credit score. But they also concede that many homeowners simply have no other choice.
• This New York Times piece suggests that it's rare for homeowners to abandon their homes, while real estate investors are much quicker to do it.
  

If you are in a situation where walking away from your mortgage feels like the only option, we recommend talking to a debt counselor first. The National Foundation for Credit Counseling is a non-profit group that offers free and low-cost counseling on debt issues. And you can also get advice from a HUD-approved housing counselor.

========================
Housing Market News - Main Page
========================