Stop paying mortgage, should you? : Bad Credit Advisor

Stop paying mortgage, should you?

Should I stop paying mortgage or should I keep making payments when my house value is way below of what I owe on the mortgage? Sure I can afford those pesky monthly payments but why should I? It is a question that has many homeowners breaking their heads and struggling with their consciences. If you are one of them, stop struggling and leave the morals and ethics well aside of your thought process. I am not advocating so you walk away from your mortgage obligations, after all you signed promissory note to repay principal and interest, but considering that the ongoing housing fiasco was created by our stupid government and greedy lenders with the help of their more than willing sidekicks including loan officers, realtors, appraisers, builders, etc., you should stop feeling guilty long before you stop paying mortgage. Everyone involved in the home buying and financing process made money and while many have lost far more than they made, it is of a little comfort to you if you are sitting on the mortgage of $200,000 when your house is worth only $150,000 and that's on a good day. Besides your next door neighbor just did stop paying and rented a much larger house in a better neighbourhood, and get this, for several hundred dollars less than that mortgage he walked away from.

On the other side, understand that if everyone will simply pack his or her stuff and walk away, the economy will die rather quick. For this to happen, you need something like 10%, maybe 15% of all home owners to do that. If you think it is way far fetched, consider that according to First American CoreLogic, a real-estate information company, there are 5.3 million U.S. households with mortgage balances at least 20% higher than their home values, and 2.2 million of those households are at least 50% under water. The problem is concentrated in Arizona, California, Florida, Michigan and Nevada, but I personally think that Illinois, New York, Massachusetts and North Carolina are not far behind. As a matter of fact, so many homeowners who can still afford to pay, stop paying mortgage every day, it is now called strategic default. And some studies suggest that one of every four mortgage defaults is strategic.

The real clincher for many home owners is the property tax. The county you own your home in, collects the real estate or property tax twice a year. You either pay directly to the county or your bank does, if you have an escrow account and pay your tax to the bank monthly, together with your mortgage and homeowners insurance. Property taxes are calculated as a percentage of your home value. I, for example, pay roughly 2%. When home prices were going through the roof, counties were raising taxes annually, often by a huge amount. With prices and values plummeting all around, you would expect that your property tax decreases rather quick and significantly. For example, if you bought the house you live in for $200,000 in 2004 and paid $4,000 in taxes for the first year, only to have it raised to $5,000 in 2006 and to $6,000 in 2007 because your house went up in value to $250,000 and $300,000 respectively, you would be reasonable to expect your taxes cut back to something like $4,000 in today market when its value is back to $200,000. That of course is not happening, since counties need cash to pay for schools, police, fire department and to their own workers who, by the way, take home fat little paychecks of your money. Which is all fine as they are needed, at least to some degree, to provide certain services and run the shop, but for many paying so much tax for so little house is the last incentive needed to stop paying mortgage and walk away.

Obviously, walking away isn't risk free. Eventually after you stop paying mortgage, you will get foreclosed. It may take few months or close to year and then some, but it will happen. A foreclosure stays on a consumer credit report for 7 years and will send FICO score down by as much as 250 points. Thus, getting credit cards, auto loans, student loans and the rest of credit you may need, will be much more expensive in terms of interest rates if not outright impossible. Even worse, many states allow lenders to go after wages and/or assets of those who stop paying mortgage just because they feel like it.

Many lenders take the walk-away homes, charge off walk-away mortgages and then sell the rights to pursue claims to debt collection agencies. Depending on the state you own your house, you may be looking at as much as 20 years after a foreclosure of dealing with debt collectors, their phone calls and even potential lawsuits. Whatever you do, act in your own interests first and foremost, without unnecessary guilt or shame. Here are few important points to ponder before deciding to stop paying you mortgage,
1. Are you willing to rent for at least 2 years after the foreclosure? No lender will extend you a new mortgage before 2-year period expires. More likely you will have to rent for 3 to 4 years.
2. Will you be looking for other loans, e.g. student, auto, credit card? The terms will be quite atrocious with foreclosure and bunch of late payments on your credit report. You insurance premiums will likely go up as well.
3. How much in tax write offs will you lose, because of the loss of mortgage interest and property tax. And you may also lose ability to itemize your tax deductions.
4. And the most important point will be - does your state allow lenders to go after the borrowers who walk away from their mortgage obligations.

And of course, you should still consider the moral angle for breaking your promise to pay and how your strategic default will affect your neighbours.

Sat Dec 19, 2009 12:12PM by Tony | More in Personal Finance | Comments (0)

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