Would you strategically default on your mortgage?

Michelle - posted on 02/16/2012 ( 8 moms have responded )

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This seems to be popular in many states (depending on recourse mortgage loan laws of course). You stop paying your mortgage when your loan becomes larger then what the property is currently worth. You have the money, but you choose to default. I don't think I could do it. Our house is paid off but even if it wasn't I would say I took the risk in borrowing the money and agreed to pay it back. So unless I was unable to I would pay on it. To do anything else seems dishonest to me and not worth ruining your credit for 7 years. But our house is our home. It's not about what it'll be worth in five years because I'm still planning to be here in 30. So even though it is a financial asset, it's not the same as it is for the person maybe hoping to double their return in 2 years, sell, and do it again. Would you do it?

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Jodi - posted on 02/17/2012

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In Australia, if the sale of the home didn't meet the mortgage owing, you'd still be obligated to pay the balance unless you went through bankruptcy.

Michelle - posted on 02/17/2012

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If you let the home go into foreclosure the home and the attached mortgage goes back to the bank. In California and several other states you cannot collect/ put a lien on other assets. So once the bank has the house they're stuck with just the house and no recourse to collect anything else from the borrower. So if you live in a state with mortgage laws like that, the owner walks away almost completely off the hook (except for the ding in their credit for 7 years) and the bank is left holding the bag.

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Michelle - posted on 02/17/2012

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Most states have recourse to recover the loss. But there are 12 states with no recourse mortgage laws. I would be willing to bet there is a correlation to the foreclosure rate in a state and whether or not they are a no recourse state.

Stifler's - posted on 02/17/2012

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Wow that's crazy. Here yeah you would declare bankruptcy and then you can't leave the country for 10 years or something like that.

[deleted account]

A law like that would fix the problem here in the US. Once the house goes back to the bank, the mortgagee is no longer responsible. Some states have lengthened the credit damage, but homes are so cheap right now a lot of people can just buy them outright by borrowing from their 401K or IRA, then make mortgage payment sized deposits back into those accounts. They miss out on some of the interest payments, but those payments are nothing compared to what they would pay in interest on a mortgage loan.

Jodi - posted on 02/17/2012

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Wouldn't you still owe any money that was left on the mortgage if the sale of the house didn't cover it? Then you'd only have to go through bankruptcy proceedings to avoid that, and to me, that's just not worth it.

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NO, I feel like it is an unethical practice and there should be more laws in place to keep people from doing this.



It is one thing to stop paying the mortgage because you cannot afford to pay it anymore, it is a completely different thing to stop paying because the investment lost value.



This phenomenon is hurting the housing market even more by increasing foreclosures, which always drives home values down. Furthermore, they are making it nearly impossible for people who actually would pay their bills to get approved for a loan.



Also, it is their fault, they should pay for their mistake. In most of these situations, the buyers have financed the full amount of their home, at an outrageously high interest rate, then made minimum payments.

First off, you should never finance more than 75% of a home's value. Chances of a home losing some value are good, but they rarely lose more than 20%--that way, you can always sell and get out of the debt.

Second, NEVER make minimum payments on ANY debt. If all you can afford is the minimum payment, you have purchased beyond your means.

Most of these people got high interest rates because they had bad credit to begin with, they don't care that their credit will be shot by the foreclosure, but because of those high interest rates, they were not able to pay down the principle of the loan. It is one of the reasons they are in the shape they are in.

Amy - posted on 02/16/2012

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I can certainly understand why it becomes the only option for some people. When my husband and I were financially unsound the bills I paid were our mortgage, the car payment, the electric bill, and my credit card bills. I stopped paying his bills because he was the reason we were in the position we were in. If he hadn't agreed to get help I was going to be looking at bankruptcy so yeah I would of stopped paying the mortgage if I had no other choice. But I also know we would never qualify for another mortgage with his credit so I plan on being here for the rest of my life as well so I will do everything in my power to make sure the mortgage gets paid.

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