Today, millions are deep under water on their homes and the probability of getting back out of this whole for many seems highly unlikely. In this scenario, when does it make sense to just “walk away”?
Cathy Curtis, CFP® says it may make sense to walk away from your mortgage when one or more of the following are true:
- The value of your home is way less than the mortgage balance
- You do not have sufficient equity in the house to refinance to lower rates
- The rent you receive does not cover your mortgage expenses
- Selling is not a viable option for you
- You can’t raise the rent on your home rental
So what happens if you walk away?
Yes, your credit score and ability to borrow in the future will be negatively impacted, but if you don’t plan on purchasing a house or any other major purchases in the near future, this may be less of a worry.
If you rent your home, you will want to be sure to read the Protecting Tenant at Foreclosure Act of 2009 to ensure your foreclosure is in compliance.
If you are a real estate investor, you will likely owe tax on the amount of debt forgiven by your mortgage lender since lenders must report any debt forgiveness to the IRS.
While walking away may make economic sense, there certainly are ethical debates on both sides of the argument.
What do you think underwater homeowners should do? Ethical or not ethical?