Today, many people are ‘intentionally’ or ‘strategically’ defaulting because cash is more valuable than credit. Because many of the banks were unethical, some borrowers don’t feel the ‘moral obligation’ to pay, especially when the banks are being less than cooperative as sellers try to work things out.
Rather than defaulting, you may want to do a loan modification. A loan modification keeps you in a home that may never be worth the value of the mortgage. Let’s look at this example: Your home is currently worth $175,000 and you owe $250,000. You have decided you want to stay in the home and the lender wants to work with you. The lender drops the mortgage to 4.5% for the next 30 years ($1,266/month). After 30 years, you will have paid over $206,000 in INTEREST alone. After 10 years, you will have paid the mortgage down to $200,000. If you want to sell after 10 years, you may or may not be able to break even and may have to stay longer.
Another option is a short sale, where the lender agrees to accept less than the value of the mortgage. A buyer comes in and makes an honest attempt to purchase your property before it goes back to the bank as a foreclosure. A short sale is advantageous for you, the seller as it shows the debt ‘settled’ on your credit and can eliminate the second mortgages completely.
After 2 years, you should be able to purchase a home if you continue to pay your bills on-time. Let’s look at buying the same type of house and having a $175,000 mortgage. At 5.5% interest, your new payment is $993/month and total interest over 30 years is $182,000. After 10 years, the mortgage will be down to $144,000. So the question will be what is best for you in the long run? Can you afford the higher payments to stay in the house (and that’s if the lender will cooperate)? Or is a short sale better?
A third option is walking away and allowing the bank to foreclose. If the house is foreclosed by Minnesota’s foreclosure by advertisement (sheriff’s sale), this usually means the first lender cannot pursue you after the final sale. However, if you have a second lender, they may still render a judgment—and possibly garnish your wages through a deficiency judgment. You may also have to file for bankruptcy to recover from any unforgiven debt.
There is no black and white answer. You have difficult decisions ahead so it is best to discuss the options with your realtor, CPA or financial planner and attorney. Remember, each home and neighborhood are different. Get a realistic estimate on the value of your home before making any decisions.
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