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.
WE WANT YOUR FEEDBACK
You have to be kidding! Who wrote this? The banks? Most people considering a strategic default will never see any return on their, “Investment.” They may also still be under water in 10 or 20 years. I plan on moving in 9 years. We owe $211,000 on a condo purchased for $275,000 that is now worth less than $80,000. So do I default (the bank won’t refinance or work out an alternative) or stay chained to this albatross because of some fake moral judgement? Why is it that commercial and business leaders have done this for years and it is ok? Stop your hypocrisy and useless information on this issue. You are obviously way out of touch with reality.
Hi Kevin,
Thanks for your feedback. This is obviously a subject many people feel passionate about. I would like to clarify that I wrote this article and that I am not a bank. I refer to the “moral obligation” argument in my post, but that is not one of my reasons against strategically defaulting. My reasons for not performing a strategic default are listed in the article. I believe there is hope for the market (especially if you are staying in your house for almost another decade – times change!) and hate to see so many people damaging their credit because things are bad right now. If you truly cannot make your mortgage payment right now, that is a different story. But if you fear the housing market and are considering selling your asset at its lowest point of value, I don’t think that is a good choice to make. I appreciate your feedback and encourage you to keep reading our blog. This is certainly a polarizing issue, but it’s great to see debate and people should have all the facts before they make any kind of financial decision.
Strategically defaulting is not at all like selling stock at the bottom of the market. When you own stock YOU have already paid for it. In a strategic default, the bank has paid for it. Your lost investment is simply the money you’ve put into the house, which in most cases probably is a net gain when you consider the negative equity you are walking away from. You seem intelligent, so you’re comparison to selling stock and strategic default is obviously an attmept to mislead your readers.
Hello Brian,
Thank you for reading this article and for your feedback. While stocks and homes differ in terms of full ownership & investment as you’ve noted, I still agree with the analogy I made in the article. If you don’t stick with your investment and wait for values to come back up you are guaranteeing yourself a loss. If you wait, there’s a good chance (due to the nature of the market) that values will rise again. If you walk away now, you lose the money that you’ve already put into the home as well as any equity you could gain back. There is no attempt to mislead readers – I think we just see this issue a bit differently. Thanks again for your feedback. I encourage you to keep commenting and keep reading!
From the perspective making a business decision, preservation of capital is always priority one. I have lost approximately 30% of the value of my home in the last couple of years. At that loss rate it would take not just a leveling out, but a large upswing in the market for me to regain just the value lost in my property. That is a very unlikely scenario especially in the next several years. Meanwhile, 24k a year in mortgage payments could be dramtically reduced by renting and those funds redirected into savings investment etc. I believe if you have lost a third of your homes value it is very difficult, from a financial perspective, to justify staying in your home. JMHO
I’m sorry to hear about your financial hardship. We just want to make sure our readers are looking at all angles before making such an important financial decision. The damage to a credit score, coupled with the possibility of the bank coming after people who’ve defaulted for the remaining balance are real possibilities that should be considered. Whatever you decide, I wish you the best.
Ugh- Thank you for the advice but again, this is of no help to me in the situation I am in. My fiance and I make enough money to cover our mortgage, but only because I drive 75 miles EACH WAY to work. There are no jobs in my field (biotech) in a 50-mile radius around my house. My mortgage company (Wells Fargo) will not work with me to refinance because we are so far underwater. We owe $103,000 and other units in our complex are on the market (no sales though) for as low as $35,000. If I left my job and fell behind on payments, then they would work with me to refinance. What kind of backwards logic is that; punishing those who work hard to pay their bills and rewarding those that sit back and don’t work?
As for your alternatives:
1. Rent your home – We could only rent our home for about 50% of what our monthly payment is, and that in itself is risky anyway. If we get a renter who doesn’t pay, then we are screwed again.
2. Wait it out – Not possible. Driving 75 miles each way (2 hours) is absolutely killing me physically. I am out of my house 14 hours a day. It’s also not sustainable to my car. This puts 40,000 miles/year on my car and costs me $500/month in gas and tolls. We cannot stay where we are now.
3. Refinance to a lower rate – Mortgage rates are at historic lows. Again, we can’t refinance. Our current rate is 6.8% and no one will refinance us. Our credit is excellent (both over 750) but we owe too much compared to the value of the property.
Any other advice..because right now walking away from this hellhole is looking pretty good, even if I do have to ruin the credit that I have worked so hard to earn.
Hi Kate,
Very sorry to hear about your situation. While it can seem like a very backwards system, we encourage people not to walk away from their homes not only due to the credit ramifications, but because we don’t know what the long term effects of default could be. Our advice is to really make sure you’ve exhausted all of your options. Talk to as many resources as possible before you make any decisions. Best of luck to you!
“Should homeowners who OWE LESS than their home is worth consider this an option?” NO, this I agree with. If you owe MORE than your home is worth as we do then this is an option.
Our situation is quite a bit more to the point. We owe $200,000 more that the homes in our area are selling for. The current value is half that what we paid 4 years ago. Even at 125% LTV we could not qualify. As for renting, our current payment is $5,000. Rent for a comparable home is $2,500. We have tried to work with Wells Fargo. All they want to do is reduce our payment and add the difference at the back end. That is negative amortization. At the current average appreciation it would take 45 years to see our home come up to the value we paid or the current mortgage.As Brian said you must be kidding. I have been investing is RE for over 30 years. How about you?
What drives me crazy about this article is that the author works for Quicken Loans (this is a quicken loans blog folks, look @ the url), so of course she’s incented to discourage anyone from even considering a strategic default ! Thus, the article doesn’t feel objective, just a lot of rhetoric.
But, MUCH more importantly – I REALLY can’t stand the down playing of the reality of the length of time for the housing market to rebound – the ‘pie in the sky’ attitude of, ‘just hang in there, the housing market will rebound!’ It just sounds so falsely perky! Ugh! Of course the market will rebound – in about 15-20+ yrs !!!! Are you seriously suggesting that people hang out in their homes for the next 15+ yrs ?! Seriously? We live in a ‘hardest hit’ state & it could very well take much longer than that (per a realtor) just to get to where it WAS pre-crash! So, given the harsh realities, & I prefer to deal with reality, that’s just NOT advice that’s even worth mentioning or considering, unless 15-20 yrs is what one had always planned on doing for settling down.
The other options aren’t so helpful either. There are A LOT of people that the FHA & Making Homes Affordable programs DON’T even begin to help. The help net must be cast much wider to help ALL those who have underwater loans, not just the ones w/a Freddie or Fannie loan. Pitiful effort! FHA loan? Well, the only thing they offer right now is a streamline refi – woo hoo!! Not a lot of help when one is seriously underwater – so maybe the mortgage comes down $200-300/mo, that still doesn’t solve the prob of being severely underwater! Sigh, those silly ‘fake’ gov’t help programs – the “Let’s pretend we’re helping our citizens out w/this new program but, we’re really not because most underwater homeowners can’t utilize them, but hey, at least it looks good” progams!
Rent out the home? For so many, the rent they could collect is now less than the mortgage due! Or, there isn’t the thousands of dollars available that might be needed to do improvements before anyone would even consider renting it. Many people live in homes now that they can ‘settle & live with’ themselves – you know, the lousy stove that burns everything, the 15 yr old dishwasher, the old carpet that needs replacing. However, no one would ever consider renting it w/those issues. AND, being a landlord & renting it out means having cash flow to hire someone to fix a maintenance problem the renter might have, or replace that darn appliance that finally broke! Now how do you do that if the rent is below your mortgage you’re paying on the silly place or you are living paycheck to paycheck? Hmmm….
Also, would you personally like knowing you’ll be living in your same house for the next 10-20 yrs min, esp if it is still so issue laden? What if your child has special needs & the school in the area cannot meet his needs & the closest one that can is 1 hr away, one way? You can’t move, your house is so underwater – do you really suggest someone essentially say to their child, “Sorry kid, your education & thus your childhood is basically screwed because the economy screwed us up. I know you need a lot more help but hey, you’re just going to have to suck it up & hope you survive the inept & inadequate school system. ”
Lastly, to some who may accuse others of over purchasing/indulging in what they couldn’t afford – many, many people purchased their homes responsibly. They are modest homes & purchased for LESS than they were approved for, you know, being financially responsible adults. What happened to them w/an underwater loan was not their fault. They are victims, through no fault of their own, & not because of stupid, over indulgent financial choices in homes. The devastation has touched everyone. It started w/greed at the top & the trickle down has been devastating. It’s all so tragic!
So you see, I still cannot find any answers to the haunting, ‘what to do’ question. I really get annoyed w/ pat answers & suggestions that aren’t really helpful, relevant, or – all the real implications, details & other ramifications on the flip side haven’t been thought thru. Plain & simple, the suggestions above have waaayyy too many holes in them. Sorry to be so harsh, just tired of reading the ‘same ‘ol same ‘ol’ from everyone w/out any one standing up & saying, “but what you’re suggesting doesn’t work!!!!!”
(And yes, a Quicken loans rep had already been called for refi advice).