Walk away from home loans

 

walk away from home loans

There are many homeowners who have found themselves in the unfortunate position of being underwater on their home. Some of these homeowners live in a neighborhood where home values have declined, and others took out too much in home equity loans. In some cases both happened.

While it’s understandable that these homeowners are frustrated, some have decided to simply walk away from their homes, even though they can afford to make their monthly mortgage payments. This is known as strategic default. There are numerous problems with the decision to walk away from one’s home when the borrower has the ability to pay.

The house across the street has sat empty for the better part of a year. According the neighborhood gossip, the owners—a young couple with no kids—walked away from the underwater mortgage. Apparently, the husband, who worked as a manager for a national restaurant chain, was transferred to another part of the country, and the couple figured it would be easier for them to simply mail the keys to the bank rather than deal with the financial headache.

Walk away from home loans

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There are many homeowners who have found themselves in the unfortunate position of being underwater on their home. Some of these homeowners live in a neighborhood where home values have declined, and others took out too much in home equity loans. In some cases both happened.

While it’s understandable that these homeowners are frustrated, some have decided to simply walk away from their homes, even though they can afford to make their monthly mortgage payments. This is known as strategic default. There are numerous problems with the decision to walk away from one’s home when the borrower has the ability to pay.

The house across the street has sat empty for the better part of a year. According the neighborhood gossip, the owners—a young couple with no kids—walked away from the underwater mortgage. Apparently, the husband, who worked as a manager for a national restaurant chain, was transferred to another part of the country, and the couple figured it would be easier for them to simply mail the keys to the bank rather than deal with the financial headache.

Peter Safronoff could afford his mortgage payments on his Rancho Bernardo condo, but the cost of keeping it was pushing him into the red each month and eating into his retirement savings. So like an increasing number of borrowers in San Diego County and elsewhere, the 64-year-old financial adviser chose to walk away from his home.

What Safronoff did, widely known as a strategic default, has not only become less of a social stigma, it’s also considered a wise business decision among a growing number of consumers, especially those who are severely underwater on their homes.

An estimated 35 percent of the U.S. home-loan defaults in late 2010 were considered strategic, increasing from 26 percent in March 2009, based on figures from the University of Chicago’s business school. This year, the nation could see an increase in the volume of these defaults when compared to last year, according to 46 percent of bank-risk experts surveyed by FICO analysts in February.

Refinancing now is generally a wonderful idea as jumbo loans are back to all time lows in 2016 due to all the volatility in the stock market post Brexit. That said, what happens if you are so underwater on your mortgage that you feel it doesn’t make sense to continue paying anymore because you don’t think value will ever recover? Banks have become so annoyingly stubborn regarding allowing underwater homeowners to refinance, that you might have a better way.

Have you ever wondered why there have been so many foreclosures in states such as California, Arizon, and Nevada? I’ll tell you. If you live in one of the 12 “non-recourse” states of Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, and Washington you are potentially in luck! If you so happen to own property in one of these states, and have substantial assets elsewhere, you can legally hand over the keys to the bank and exonerate yourself from the mortgage with no penalty against your other assets!

However, say you bought the house for $800,000 with a mortgage of $300,000, and then a few years later took out a second mortgage worth $500,000. Real estate market crashes and the house is now worth $100,000, leaving you upside-down on the house by $300,000. If you turn over the house, you can walk away from the first $300,000 mortgage, but you’re still liable for the second $300,000 mortgage. Since you no longer have the collateral, the second mortgage is now an unsecured debt.  Unsecured debts can be discharged in bankruptcy.

The following is an article originally posted on www.frugaldad.com and is reprinted here with the permission of Jason from Frugaldad. The views in this article are those of the author and may not reflect the opinions of Quicken Loans and its team members.

For some, the idea of walking away from a mortgage presents quite a moral dilemma. Others feel duty-bound to fulfill their contractual obligation to continue making payments to the lender, regardless of how much (or how little) their home is worth.

Personally, I believe if one has the ability to pay their debts, any debt, they should pay them . This idea doesn’t stop with mortgages. I don’t like voluntary car repossessions or walking away from credit card debt you legitimately owe and can afford to pay.