Editors note: We have some great news! Quicken Loans allows refinances of up to 200% of your home’s value on mortgages owned by Fannie Mae and Freddie Mac through the HARP Program.
In order to participate in HARP, either Fannie Mae or Freddie Mac must own your loan.
See if you qualify for HARP or call today (800) 251-9080 to find out how much you could save.
And finally, the Federal Government has extended HARP until the end of 2015.
Many people in America today are faced with a financial problem. They simply owe more on their mortgage than their house is currently worth. In the industry, this is referred to as “being underwater” or an “underwater mortgage.”
This current state of affairs has many homeowners asking themselves: “Should I stop paying my mortgage?” This has recently been referred to as a “strategic default.” Borrowers walk away from their debt (stop paying their mortgage) and either foreclose or complete a short sale on the house.
Is this a good idea? Should homeowners who owe less than their home is worth consider this an option?
In a word, no. Don’t walk away from your mortgage.
It may seem like a relatively sound idea – stop paying money toward a losing investment, take a potential credit hit and in 5-7 years be back in good standing when the housing market turns around. The main reason the media has been giving for avoiding this practice is a “moral obligation” to fulfill a contract with a bank, which can mean very little to a family that is struggling to make ends meet.
However, there is much more at stake when you foreclose on your home. Beyond any moral obligation, there are consequences, but more importantly – just some things you should consider before you make any major decision that could affect your life for years to come:
Reasons You Should Not Walk Away From Your Mortgage
- The housing market WILL bounce back – Your home is an investment, and investments aren’t always profitable. Think of your 401K or any other stocks you have. Investments go up and down, and selling or foreclosing on your home is equivalent to selling stocks at the bottom of the market.
- Banks are catching on – Banks are getting wiser as more people who are capable of paying their mortgage continue to choose to default. There is a difference between someone who is forced to foreclose because they can simply no longer afford payments, and someone who is making an active decision to strategically default. Expect harsh penalties from banks for strategic defaulters in the near future.
So, if you’re in an underwater situation and are struggling and/or just want out – what can you do?
Other Options Besides Strategic Default
- Rent your home – If you want to have a lower housing expense, consider renting your home and moving into a cheaper rental property. The ideal situation would be the rent payments from your tenants would cover your mortgage, and your new rent payment would be less than your mortgage payment.
- Wait it out – Don’t panic! As stated above, home values will return. Be patient and take care of your home so when values go back up and if you still want to sell, you’ll be ready.
- Refinance to a lower rate – Mortgage rates are at historic lows. If you haven’t refinanced already, now’s the time. If you purchased during the burst with an FHA loan, check out the FHA streamline refinance. This is a great way to refinance your home with NO APPRAISAL – that means that it doesn’t matter if you’re underwater. Your home’s value does not factor in to your ability to refinance. VA Loans also offer a streamline option. Another options is the government’s Making Home Affordable Program, which is designed to help people who owe more than their home is worth and/or people who are struggling to make their mortgage payments. Get a lower monthly payment and afford to stay in your house.
If you really cannot afford to make your payments, talk to your bank before you make the decision to stop paying your mortgage. And if you are thinking about a strategic default, you may want to reconsider. Regardless of any moral obligation, remember that your home is an investment. With a little time and patience, that investment can still pay off.