With home prices continuing to drift lower nationwide, something like one in five homeowners now owes more on their mortgage than their house is worth. It’s tempting to consider just walking away and starting over. Here are a few reasons why that’s a bad idea.
I owe about 50K more on my mortgage than my house is worth. By the time we hit bottom, I bet it will be closer to 100K. Is there a good reason I shouldn't just "walk away"? Even though my credit will be toast for seven years (along with millions of other people), at that point I will probably be able to buy a bigger house for less than I owe today. If I continue making payments, then in seven years I will still not be above water. Seems like I would actually come out ahead in the long term.
Brian T., Boston.
As in past housing busts, the ongoing surge in foreclosures has revived stories about a practice called “jingle mail” — in which people just mail their keys to the bank and move away. It’s hard to know just how widespread the practice really is. But it’s not a good idea, for several reasons.
The most important reason: You signed a contract, took the money and promised to pay the lender back. That’s what the law now requires you to do. If you can’t, the law provides for a number of other ways to discharge your debt properly.
There’s a lot of blame to go around for the current housing and lending meltdown: Borrowers bought more house than they could afford, mortgage brokers tricked borrowers into signing ruinous loans, lenders paid no attention to whether borrowers were good for the money, appraisers went along with ridiculous home values, Wall Street packaged bad loans for sale to investors, rating agencies failed miserably to warn those investors about the risk, regulators slept through the entire mess, etc.
None of that, however, has anything to do with your obligation to pay a debt you agreed to take on — unless you can prove you were a victim of fraud or predatory lending. If we all got to decide which bills we wanted to pay, we wouldn’t have a functioning economy for very long.
Here’s another good reason: You may not have to throw in the towel on your mortgage after all. The government has just created a $75 billion program to help people in your situation. There’s no way to know whether you’ll qualify for help unless you call your lender. Some lenders are prepared to forgive some — or all — of the principal that exceeds the value of your house. Others may lower your monthly payment and push that extra principal into a “balloon” payment — a lump sum you’ll owe when you sell your house or pay off the rest of the mortgage. If you stay long enough for the housing market to recover, you may find you’re no longer underwater on your loan.
If you don’t qualify for a loan modification, you can try to arrange what’s called a “short sale” — where the lender agrees to let you sell your house at current market value — and then lets you off the hook for the remaining, unpaid mortgage balance. If you can’t find a buyer, the lender may accept what’s called a “deed in lieu” of foreclosure; basically, you sign over the house and the lender calls it even.
You may not find any of these options very attractive; the process of contacting your lender and negotiating a resolution won’t be easy. The lending industry has been far too slow in coming up with practical, effective solutions for the mess it was partly responsible for making. None of that, however, lets you off the hook for properly terminating the agreement you made with the lender. Millions of homeowners are in the same (leaky) boat.
If none of these alternatives work, the law still provides for people who — for whatever reason — can’t pay their debts. It’s called bankruptcy. It’s probably the last option to consider; it will ruin your credit rating, and it’s not a pleasant process to go through. But there’s no shame in finding yourself unable to pay your bills.
Which is more than can be said about just walking away from them.
I'd like to consolidate my credit card debt and would appreciate a reference to a reputable company.
— Ray S., New York
There’s no magic to consolidating debts and really no reason you should pay someone else to do it for you. If you do, the odds are you’ll pay more than you need to.
There are several reasons for consolidating debts, including the convenience of making one payment. But the main reason is to try to lower the rate you’re paying on higher-rate debts, like unsecured credit cards, by using lower-rate credit, like a home equity loan secured by your house.
The only way you’ll know if you can get a lower-rate, consolidation loan is to shop around among various lenders in your area. Stick with local banks you know or established national lenders; there are plenty of “consolidation” lenders trolling the Internet for suckers — uh, customers. Avoid those pitches you get in the mail or on the phone or Web sites that promise to “make your debts disappear.” These folks typically charge a big upfront fee; in some cases, that may be the last you’ll hear from them. In other cases, they’ll try to get you to sign over your home.
And steer clear of storefront “payday” lenders who charge outrageous rates. You’re looking for a lender who will offer a fixed-rate, secured loan or line of credit.
You’ll get a lower rate on a secured loan because the bank bears a lower risk that you won’t pay it back. If you don’t, the bank can take back whatever you’ve used as collateral to secure the loan.
The downside to borrowing against your house, of course, is that it’s far too easy. As many people now losing their homes have discovered, there are huge risks — never mentioned by the banks that carpet bomb your mailbox with teaser rate offers — to using your home as an ATM machine.
If, after shopping around on your own, you find you still need help, find a HUD-certified credit counselor in your area to help walk you through the process. One of the easiest ways to find these agencies is to look them up on the National Foundation for Credit Counseling Web site. You may be asked to pay a small fee.
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