The million dollar question millions of Americans are asking themselves is “should I walk away from my underwater mortgage?
The situation is so dire that according to Moody’s Economy.com 17.4 million homes will be underwater by the end of 2010.
That is worth reading again: By the end of 2010 17.4 million homes might be worth less than the value of their mortgage.
This presents homeowners with a dilemma. Should they continue making big monthly payments on a home that might never be worth what is was bought for, especially when there are cheaper rentals in the same area?
The answer to that question is not easy; there are many factors to take into consideration before deciding if a “strategic default” makes economic sense.
However many homeowners don’t even consider it an option out of fear and guilt. The moral argument is that when you signed your mortgage you gave your word you would pay for it, so it is your responsibility to stick to your word. Banks like that argument, and most of us can see the logic in wanting to keep your word, that your yes mean yes. However a mortgage is a business agreement and it is not as simple as all that.
When you sign a mortgage agreement you are not accepting charity, a display of trust or blind faith from your loving bank manager. You are entering a business agreement where you agree to pay back the money you borrow with interest. The agreement you sign clearly states that if you don’t pay your mortgage the lender will receive the loan’s collateral in compensation. The bank is required by law to carry out due diligence when assessing the price of the house is fair and that you are capable of paying the mortgage payments.
So when you walk away from your mortgage you are not lying you are simply using an option included in the mortgage, an option you feel is more financially sound.
However, others don’t walk away from a mortgage not because of morals but out of fear the bank will go for their other assets, like a car, a second home or their savings, in an effort to cover the losses of the underwater mortgage.
This is a legitimate concern, but it depends in which State you live in. If you are fortunate enough to live in a no-recourse state like California or North Caroline you have nothing to worry about. Banks cannot claw at your other assets to cover the whole you left in their real estate portfolio. However if you live in a State that has recourses there is a higher risk.
However, lawsuits are rare because they are so expensive and judges tend to empathize with the troubled homeowner before shedding tears for multibillion corporations.
Nevertheless, if you are considering walking away from your underwater mortgage one of the first things you want to find out is if you live in a recourse or no-recourse State.
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