Home prices continue to struggle to recover. On top of that, there are even predictions that home prices will dip again by June 2012. Economic conditions remain difficult, and that means that the housing market will have a hard time recovering. In the meantime, many homeowners are struggling to make ends meet, and facing the difficult question of what to do with a home that may have negative equity.
Photo by Respres via Flickr
In some cases, it might even make financial sense to walk away from a home mortgage. Even though your credit score will suffer because of your decision, you might be better off financially by walking away. The decision to allow a foreclosure to happen, even though, technically, you can make payments, is called a strategic default.
While many of us hate the very idea of a foreclosure, the idea of strategic default is appealing to some. Among the reasons for strategic default are:
Basically, walking away from your mortgage is a financial decision that you might make sense if you feel like you are throwing good money after bad, struggling to get ahead, but being held back by the home mortgage payments. Plus, foreclosure proceedings don’t start until you’re delinquent for 90 days, so you have three months to find a new situation, and any time after until you are officially made to leave. In some areas, the backlog is so bad that residents aren’t evicted for a year or more.
As long as you can deal with the credit ramifications (you won’t be able to buy a home again for at least two or three years, and the foreclosure will appear on your credit report for about seven years), you might be able to salvage your finances by walking away.
Of course, just because something might make financial sense for you doesn’t mean that it’s ethical. For many of us, the decisions we make with our money go beyond the hard facts associated with running the numbers. Some would argue that it doesn’t matter how much financial sense it makes to walk away — a strategic default is breaking an obligation you have made to pay what you owe.
In some cases, foreclosure might be the only option. Most people agree that someone who bought a modest, affordable home, and then can’t keep up with payments because of job loss or some other financial disaster, might be in the right for allowing foreclosure, since they have tried their best to meet obligations and buy an affordable house.
However, in many eyes, strategic default is a different matter. This is because strategic default is about making a calculated decision to stop making mortgage payments, even though the homeowner might be able to afford the mortgage payments. Ethically, should you stop making mortgage payments, breaking your word to pay as agreed, just because it’s no longer “worth it”?
What do you think? Under what conditions is a foreclosure ethical in your opinion?
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