Thinking about walking away from the house

[muzic_lvr]

Talk me into or out of it -- I'm not sure. We owe $458k approx. on our current home, but the homes are falling so fast I can buy a newer home (2005) that's nearly twice the size of my current home that has 5br, granite counter tops, travertine tile, flagstone pool & spa, and many more for only $359.

 

In the meantime, my mortgage has reset 3 times , but the value has dropped $100k in just over one year. I can't refi, and I we are so frustrated we're ready to toss in the keys.

 

Calif. has no deficiency judgments, and the President has recently signed the law that eliminates paying taxes on that made-up income created by getting debt relief from dumping your home. We make enough income to qualify for a new loan, especially one for $100 less than our current obligations, and we can also rent our current home for close to the payments -- until they reset again!

 

Tell me where I'm going wrong? Should we continue to, as some say, throw good money after bad, or should we just hang in there and pray for something -- something that may never come?

 

I would love to hear from the mortgage gurus here on the board; I really appreciate all your input throughout all the forums here at creditboards .

 

Thanx

[Brian B The Loan Professor]

There have been some long discussions on this very topic within the last week. You can get a lot of opinions by just scrolling down and reading the posts.

 

It comes down to a personal choice.

[horseymen]

This ethics question has come up a lot and also comes up on the credit board - do you have an ethical obligation to pay your bills after a couple of years and you are able (despite the credit hit?) or do you play the credit game?

 

Or do you view it as a game? And it's all about scores and moveable objects. And who is to say your 359k home won't do the same thing after 5 years?

 

California and Florida are so much out of whack compared to midwest - it may take a little more of a hit..

 

I don't think there is a right and wrong answer - it's just your personal choice.

[hoapres]

As others have said you can search for prior posts. You can do a search off my username as well as I discussed the issue with regards to California.

[Needalotofhelp]

Why did you take out an ARM in the first place?

[Bloody but Unbowed]

I dont know what to tell them to do, but I know that chastising them for having an ARM is not going to help

[jst300z]

No where in your post says anything about a job loss/pay reduction, major medical condition or income worries.

 

With that said, I say suck it up and pay your mortgage. You opted for buying the home, now follow through with your contract.

 

[Cleaning_Credit]

Talk me into or out of it -- I'm not sure. We owe $458k approx. on our current home, but the homes are falling so fast I can buy a newer home (2005) that's nearly twice the size of my current home that has 5br, granite counter tops, travertine tile, flagstone pool & spa, and many more for only $359.

 

In the meantime, my mortgage has reset 3 times , but the value has dropped $100k in just over one year. I can't refi, and I we are so frustrated we're ready to toss in the keys.

 

Calif. has no deficiency judgments, and the President has recently signed the law that eliminates paying taxes on that made-up income created by getting debt relief from dumping your home. We make enough income to qualify for a new loan, especially one for $100 less than our current obligations, and we can also rent our current home for close to the payments -- until they reset again!

 

Tell me where I'm going wrong? Should we continue to, as some say, throw good money after bad, or should we just hang in there and pray for something -- something that may never come?

 

I would love to hear from the mortgage gurus here on the board; I really appreciate all your input throughout all the forums here at creditboards .

 

Thanx

 

I see that your in So. Cal. My opinion is that prices will continue to decline here for at least another 2 years. When the housing market does bottom out, it'll stay flat for some time before going up. If you can rent your current home for the mortgage/tax payments, why not do that? Then you can buy another home that's larger to live in. You mention that you have the income for a new loan, but do you have the $$ down and enough $$ in reserves to qualify for another loan. Credit is tighter these days.

[loch_ness]

Sounds pretty irresponsible to me to just walk away. You are able to make the payments. No one LIKES to make payments. The laws were created for people who cannot make their payments and for those who were victims of predatory lending. Not for those who simply no longer like their house and the mortgage terms they agreed to.

 

Have you asked the bank for a rate lock?

[dgilbert]

i wonder what kind of rate you will get if you let this one go. i bet it won't be pretty, you will probably pay more per month on the new house than you currently pay for your old house. how would that feel when combined with teh major negative on your credit?

[Cleaning_Credit]

i wonder what kind of rate you will get if you let this one go. i bet it won't be pretty, you will probably pay more per month on the new house than you currently pay for your old house. how would that feel when combined with teh major negative on your credit?

 

As mentioned, in Cali... there is no recourse for the deficiency by borrowers if they walk away from their homes. With the law from last year, they are also not charged taxes for that deficiency. Basically, all they would get is a ding in their credit. To many, that ding is very nominal compared to the $100,000's saved by not paying on an upside down mortgage. My guess is that the OP was saying to buy a new home before walking away from the 1st home. Get a fixed 30 yr at a decent rate for the new home, then walk from the prior home.

 

With the commission and closing cost of selling my home, I'd be upside down myself if I tried to sell my house. I could do what OP mentioned, but I will continue to stay in my upside down home. I'm not a speculator.

[54regcab]

As more people toss in the keys home values will continue to decline. Lending standard will get stricter, it wouldn't surprise me if lenders start requiring 20% down payments on CA loans.

[helcat]

The other consideration beyond the mortgage pros and cons is that once that "ding" hits your credit report you will most assuredly be rate-jacked on your credit cards if not CLD. I'd rather eat my possible losses on my home, and hope for a recovery in a few years, than to take the chance of destroying all of my other options for 7 years.

[hoapres]

Walking away looks real attractive when has over $250K in negative equity.

[loch_ness]

Walking away looks real attractive when has over $250K in negative equity.

 

Where's the guarantee of return in a mortgage?

[delzer]

Walking away looks real attractive when has over $250K in negative equity.

How did it look walking in? Who is to say in 10 years they could have over $250 in positive equity. There are no guarantees but if you sign to borrow money from someone and do not pay it back, I fell to see how that is a psoitive thing. JMO

[My4sons]

I am alot like the OP and it is a terrible situation. I live in Mi built a new home last year and we can not afford the payment after my husband lost work due to a kidney diease. My home is in forclosure and it will be auctioned on the 20th of March.

We can not claim Ch 7(too much income) and were told Ch 13 would make our lives hell. I never thought I would be in this postion. Our credit score is low and I am waiting to see if First Franklin will modify my loan. I think if you can make you payments don't walk away due to upside down equity. I am hoping for the mod. I have a high rate now with arm to set May 2009. I am already talking to realtors to get this house sold!!!!! I know I will feel so much better if I can get a payment we can afford and sell it even if I have to try for a short sale. Good Luck to You!! It's a very hard decision.

[Needalotofhelp]

I dont know what to tell them to do, but I know that chastising them for having an ARM is not going to help

 

 

 

I agree. That's why I only asked a simple question.

[loch_ness]

I am alot like the OP and it is a terrible situation. I live in Mi built a new home last year and we can not afford the payment after my husband lost work due to a kidney diease. My home is in forclosure and it will be auctioned on the 20th of March.

We can not claim Ch 7(too much income) and were told Ch 13 would make our lives hell. I never thought I would be in this postion. Our credit score is low and I am waiting to see if First Franklin will modify my loan. I think if you can make you payments don't walk away due to upside down equity. I am hoping for the mod. I have a high rate now with arm to set May 2009. I am already talking to realtors to get this house sold!!!!! I know I will feel so much better if I can get a payment we can afford and sell it even if I have to try for a short sale. Good Luck to You!! It's a very hard decision.

 

I doesn't seem that your situation is at all like the OPs. OP can pay - has not had loss of income, illness, or any other hardship.

 

Good luck to both of you, whatever you decide

[Cleaning_Credit]

As more people toss in the keys home values will continue to decline. Lending standard will get stricter, it wouldn't surprise me if lenders start requiring 20% down payments on CA loans.

 

Home values have tanked horribly in Calif and will continue to for a couple of years. Lending standards are stricter and it will be very likely that large downs will be required to get a loan.

 

The other consideration beyond the mortgage pros and cons is that once that "ding" hits your credit report you will most assuredly be rate-jacked on your credit cards if not CLD. I'd rather eat my possible losses on my home, and hope for a recovery in a few years, than to take the chance of destroying all of my other options for 7 years.

 

 

If I had a mortgage on a home that was $500k with monthly payments of $2900, then bought a second larger home with a mortgage of $350k for $2k monthly payments, there would be a savings of $900 per month. I could have a bigger home with a much smaller mortgage and smaller monthly payments. Over the life of the mortgage, I would have saved $100k's. I would think that the rate jack wouldn't cost me more than $900/month. That ding on my credit would be workable compared to the huge financial savings and bigger home.

 

 

Walking away looks real attractive when has over $250K in negative equity.

How did it look walking in? Who is to say in 10 years they could have over $250 in positive equity. There are no guarantees but if you sign to borrow money from someone and do not pay it back, I fell to see how that is a psoitive thing. JMO

 

But that $250k in equity after 10 years could've been $500k.

 

 

These are just scenarios. If it's not a distressed situation where one couldn't pay your mortgage, it becomes a completely ethical question. If you care more about the bottom line, walking away makes sense. If you cared about moral responsibility to keep your promises and not hurt your neighbors/economy, keep paying your upside down mortgage.

[muzic_lvr]

Thank you, everyone, for all the comments. It certainly brings up a lot of emotion, but personally, I don't feel any moral obligation at all.

 

Just because a party enters a contract, that does not make that party "morally" responsible to fulfill the obligations of that contract. Contracts are breached every single day of the year, and the very reason the law does not allow punitive or exemplary damages for a breach of contract action is to actually encourage someone to go ahead and breach a contract and pay the normal damages that flow from that breach. There's nothing moral or immoral involved; it's business, and in business, sometimes it makes much better sense to breach your contract and enter into another one.

 

The purpose of my original post was to solicit whether there were some unseen circumstances that I was just not seeing. Yes, we took out an ARM loan, and as it turns out in today's market, it was a bad deal. Two years ago or so, we would have already refinanced out of this loan and into something better.

However, I just happen to feel that I could breach the contract because the breach makes much better business sense for me and my family in today's market. As Cleaning_Credit mentioned, the values in Calif. are tanking, and tanking fast with no better outlook on the horizon. In my situation, I just couldn't see the real negative from purchasing a new home and then breaching the contract on the present one. I've learned here that the ding on a foreclosure is nowhere near the ding for a BK, and since we'd already be in a newer, bigger home at a presumably a better rate, we wouldn't be devistated by such a credit blow.

 

Again, thanks for all your input. I don't know what we will do, but the LIBOR rates are down, so there's actually a chance our rate could adjust downward if it stays or drops lower than where it is right now. Maybe that will force our hand one way or the other, and we should learn about that real soon :-0

[cr3d1t0r]

These are just scenarios. If it's not a distressed situation where one couldn't pay your mortgage, it becomes a completely ethical question. If you care more about the bottom line, walking away makes sense. If you cared about moral responsibility to keep your promises and not hurt your neighbors/economy, keep paying your upside down mortgage.

 

 

It's not an ethical issue. The loan is backed by collateral, the house. If the borrower can't or won't pay, the lender gets the house AND equity ( if any ). Let's say you have 25% equity in a $500K house, but due to circumstances ( a jobloss/injury) you are unable to pay the mortgage. Do you think the bank will give you the equity back after they foreclose on you. What moral responsibility is there to keep paying a mortgage, especially an upside down one? It sounds like you are selfishly trying to protect your own home's value by keeping people in untenable financial situations.

[spikedup]

Thank you, everyone, for all the comments. It certainly brings up a lot of emotion, but personally, I don't feel any moral obligation at all.

 

Just because a party enters a contract, that does not make that party "morally" responsible to fulfill the obligations of that contract. Contracts are breached every single day of the year, and the very reason the law does not allow punitive or exemplary damages for a breach of contract action is to actually encourage someone to go ahead and breach a contract and pay the normal damages that flow from that breach. There's nothing moral or immoral involved; it's business, and in business, sometimes it makes much better sense to breach your contract and enter into another one.

 

The purpose of my original post was to solicit whether there were some unseen circumstances that I was just not seeing. Yes, we took out an ARM loan, and as it turns out in today's market, it was a bad deal. Two years ago or so, we would have already refinanced out of this loan and into something better.

However, I just happen to feel that I could breach the contract because the breach makes much better business sense for me and my family in today's market. As Cleaning_Credit mentioned, the values in Calif. are tanking, and tanking fast with no better outlook on the horizon. In my situation, I just couldn't see the real negative from purchasing a new home and then breaching the contract on the present one. I've learned here that the ding on a foreclosure is nowhere near the ding for a BK, and since we'd already be in a newer, bigger home at a presumably a better rate, we wouldn't be devistated by such a credit blow.

 

Again, thanks for all your input. I don't know what we will do, but the LIBOR rates are down, so there's actually a chance our rate could adjust downward if it stays or drops lower than where it is right now. Maybe that will force our hand one way or the other, and we should learn about that real soon :-0

 

I couldn't agree less, but whatever. It's your choice. Would you stop paying credit cards if there was no such thing as a credit reporting agency, as well? That tv you bought isn't worth as much as it was yesterday.

[Daddy]

OP,

 

You make some VERY good points! People break contract all of the time. I don't see people getting mad at people when they break their Sprint or Verizon or T-Mobile contracts. I don't see people getting mad at people when they break their gym membership contracts. Hell, I CAN pay for my gym membership, but I still cancelled it because I thought it was becoming a rip-off, because I couldn't go. I thought about cancelling the cell phone contract because it's a rip-off, because I never use 1/4 of the minutes, yet they still charge me full price. So I'm with you, what kind of moral obligation do we have to stay in our homes and pay our mortgages? None. I'll stay in mine and continue to pay my mortgage, because I want to and because I love the house and because I can and because I don't want to mess up the good credit I worked hard for. But I wouldn't be any less of a good person if I said "F" it and walked away. Heck, I wouldn't be mad at my neighbor if he let his home go into foreclosure, and that caused my home value to go down $10k. He did what he felt was right for his family. I can't get mad at that. People want to own a beautiful home, so sometimes, they do stupid things to get into them, such as ARMs and just plain rushing it when you really aren't ready. But we are all human, and sometimes it's not fair that a mistake we made 3-10 years ago will come back and continue to bite us in the flowers. Sometimes, I say damn, I am paying $850 a month in interest. Someone with a higher rate on triple the mortgage (which is very common for someone who is in So. Cal) would be paying $3000 a month in interest or more. So I can see why they would say F this, I'll let it go and start renting for $1500 a month.

 

So no, I wouldn't let my home go, even if I was struggling. However, I can't get mad at you if you do. Whatever you decide to do, good luck!

[spikedup]

Appropriately from the nytimes today:

 

"There’s a whole lot of people who would’ve been stuck as renters without these exotic loan products,†Professor Sinai said. “Now it’s like they can do their renting from the bank, and if house values go up, they become the owner. If they go down, you have the choice to give the house back to the bank. You aren’t any worse off than renting, and you got a chance to do extremely well. If it’s heads I win, tails the bank loses, it’s worth the gamble.â€

 

“Will everyone walk out?†he said. “No. But there’s been a cultural shift. Buying a house used to be like entering a marriage, a commitment for life. Now, if you see something better, you go back into the dating market.â€