Q&A: Should You Walk Away from Your Mortgage?

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Q: We’re struggling with our mortgage payments after my husband lost his job, but we are managing to keep up every month thanks to unemployment, some savings and my part-time job. Unfortunately, we over-bought with little money down, and now our mortgage loan is about $60,000 more than the value of our home. What would happen, good or bad, if we decided to cut our losses and walk away? — T. Duncan, Portland, Ore.

A: Sorry for your financial troubles. It’s not easy making a mortgage payment when the main breadwinner is out of a job.

But without knowing what you have in savings, and the prospects of either you or your husband finding better-paying jobs (a tall order these days), it wouldn’t be fair to tell you to walk away from your mortgage.

What we can do is list the impact of walking away from a mortgage and let you judge the situation yourself.

First, know that you’re hardly alone. According to a recent University of Chicago/Northwestern University study, about 31% of all mortgage foreclosures are classified as “strategic defaults” — that’s the clinical term for walking away from a mortgage. What’s more, roughly 25% of all U.S. mortgage borrowers — about 11.3 million in all — were underwater on their mortgages by the end of 2009.

If you’re looking for a baseline, one of the study’s co-authors has one. Paola Sapienza, a finance professor at Northwestern, says if you’re more than 25% underwater on your mortgage (i.e. if the house is worth $150,000 and you owe $200,000 on it), then it makes sense, from a financial perspective at least, to drop the keys in the mailbox and walk away. We don’t know what your monthly mortgage payment is, but chances are you can get a rental at a significant discount to what you’re paying for your house every month. Just make sure you set the rental up before you walk away from the home mortgage, otherwise the hit to your credit score might give you trouble with any potential landlords.

The bad news is the credit score we just mentioned. The credit scoring giant Fair Isaacs estimates that even a homeowner with a pristine 780 credit score should expect a 150-point decline in that score after walking away from his or her mortgage. Plus, the stain on your credit score will stay there for seven years, making it virtually impossible to get another mortgage loan in that time frame, let alone a car loan or new credit card. Chances are if you walk away, you’ll still be on the hook for any mortgage costs, and for any second mortgages you may have taken out.

Then there’s the ethical issue. Sure, banks made plenty of bad loans, and then got billion-dollar bailouts from taxpayers, including you. Even so, a mortgage loan is a contract with your good name attached, and walking away from it means breaking that contract.

So, no question it’s a tough call. From a strictly financial standpoint, get some help with your decision from YouWalkAway.com. It has a useful calculator to decide if walking is your best bet.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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