Does It Make Financial Sense to Walk Away from Your Mortgage?

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.

Could a Strategic Default be a Good Financial Decision?

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:

  • Your home’s value has fallen so much that getting any sort of positive equity is practically impossible.
  • The rent you receive on a rental property doesn’t cover the mortgage and other expenses, so you continually have negative cash flow on the property, draining your finances.
  • You plan to move (for work, lower cost of living, or some other reason), but you are having difficulty selling your home — or selling it for an amount that will pay off your mortgage.
  • You are afraid that you will lose a major source of income soon, and you want to stop paying on the mortgage, and instead save up and prepare to rent instead of own.
  • You can’t refinance your home to a lower rate to make the mortgage payments more affordable.

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.┬áPlus, 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.

Financial Sense Doesn’t Always Mean that It’s Ethical

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?

About the Author

By , on Nov 17, 2011
Miranda Marquit
Miranda is a professional personal finance journalist. She is a contributor for several personal finance web sites. Her work has been mentioned in and linked to from, USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, The Wall Street Journal, and other publications. She also has her own personal finance blog: Planting Money Seeds.

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Leave Your Comment (5 Comments)

  1. Pinyo says:

    @mike – I am sorry about the home value. I can certainly relate to outgrowing the house since I was in a similar situation not too long ago. I bought a 3 bedrooms in 1998 with my parents, but since then got married, had a son — and the house was cramped. I was lucky that an opportunity presented itself and now things got better.

    Have you considered walking away from your mortgage?

  2. mike says:

    bought my home in 2006 ( sept ) New jersey for 230k …. Small 2 bedroom home for my new wife and I who were just getting married in oct of 2006 of course wanting a home of our own and buying our first house. we stumpled across a small 2 bedroom no basement no garage home that had tons of potential.. weve basically remodelled the inside of the home and still have unfinished projects outside like siding.. Our house now is currently worth 135k, how is a person who now has 2 kids hates his house cause its too small and cant go anywhere suppose to appreciate paying 2k a month mortage in a house that will never get a return value.

  3. Pinyo says:

    @Terry, thank you for sharing that info.

    @Paula, I follow the same school of thought as you. Put your emotions aside and let math and logic decide.

  4. Paula says:

    I’ve heard the argument that each person should treat their individual finances like a business would treat its finances, and they should ask themselves: Is paying this bill STRATEGICALLY the long-term best decision for my bottom line? Or is defaulting a strategically better option?

  5. Your article is very timely. A new program is available that is aimed to help people whose houses are underwater and who have lost their jobs. It’s called the “Home Affordable Unemployment Program.”

    This was a program that President Obama mentioned about 2 weeks ago.

    Here is the link: http://portal.hud.gov/hudporta.....oreclosure

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