Is it better to walk away from your mortgage?

Interesting NPR Talk Of The Nation program about people walking away from their mortgages. We’re continuing to see upside down home values in Utah so we can expect to see more Owners in this situation here in Utah.  What do I think it would take for most families to consider walking away from their home and allowing the bank to have their house?  Well, if you’re 25% upside down or more on a home that was valued at $500,000 in 2006, and is now valued at $350,000 then you are  probably looking at 10 years before your home reaches back up to a $500,000 value.   In the high value or hardest hit areas; like Herriman, Riverton, Saratoga Springs, Lehi, and Eagle Mountain in Utah county the depreciation can be as high as 60%.   If you purchased or refinanced for 100% in 2006 or 2007 you probably are 25% to 30% upside down on you home.   I definitely see people walking away when even a short sale can’t get approved.  The real estate community is very active in listing short sales but the banks, especially the 2nd mortgage holders,  are not cooperating.  I currently have 3 short sales where the 2nd mortgages are causing a foreclosure because they want too much money for their payoff or they just wait too long for the first mortgage holder to make up their minds.

I have one friend that walked away from his home.  Well, he is actually still living in the home even though it was foreclosed on 6 months ago.  The bank never contacted him.  He lives in the earth slide area of North Salt Lake.  In this case, he stopped paying his mortgage because the home was worthless and the area will soon get condemned.  I’m amazed the city hasn’t done that already with the gas lines moving as the ground shifts.  One break and a home could fill up with gas and then a simple spark and then boom. The whole neighborhood would be gone. That’s really scary and people’s lives are at risk!   When your home is condemned the City does not buy it, so you still own it and you’re still responsible and you can’t live there.  Usually you have to remove the home at your own expense.  I was over at this friend’s place awhile ago and saw his neighborhood and 2 homes were condemned because they were literally breaking apart.  There are 8 inch gaps in the roads where it has split.  He said there are Qwestar trucks sniffing for gas leaks every day.  It’s not a matter of if, it’s a matter of when.  I guess I can’t blame them for walking away.

Listen to the NPR show on the topic and tell me what you think.  I can say from the voice of my 16 years of Mortgage experience, its much better on your credit report to have a situation dealt with quick even with a bankruptcy, rather then going through years of late payments and struggle.   A short sale would be preferable to a foreclosure or walking away.  Let’s be clear, that I don’t in any way condone not paying your bills or mortgage.

Now also allow me to  have a straight look at the financial or reality of it all.  After all, this is the REAL Real Estate News!  If your in an area where your home is upside down by $100,000 or more you will not see that kind of appreciation for maybe 10 years or more in the Salt Lake Valley.  That is unless they bring back stated income and stated asset loans.  That is not happening any time soon!  We’re in for a year of continued downward adjustment then many years of flat to slight increases.  So you’ll end up paying an extra $100,000 on an underwater mortgage over the next 10 years at 5% interest.  The numbers are $5,000 a year in interest or $50,000 in interest for 10 years.  Wow, now you are at break even on your home!  Isn’t that sobering when you look at it that way?  So you pay $50,000 over 10 years or do a short sale and buy a similar home again in twelve months, but pay $100,000 less.  In 10 years you would have $100,000 in equity and $50,000 less in interest paid.  A $150,00 swing represents a lot of financial future for a family.   Now for the bad news: what are the credit implications of your choices and the impact on getting a mortgage in the future?  If you do a short sale you can buy another home in 12 months after your last late payment because of a hardship or buy again after 3 years if the short sale was debt related.   If a Chapter 7 bankruptcy is involved then you wait 2 years after discharge before you can purchase again.   With a chaper 13 bankruptcy you can purchase in 12 months with trustees approval.  A foreclosure will keep you from a mortgage for a minimum of 3 years.  All of that is on the current FHA guidelines. Just like NPR  says, it’s a hard conversation for a family to have .  What do you think,  please comment!