Even With The Real Estate Crisis, Walking Away From That House Is Not A Good Idea
In the middle of the real estate boom, a large amount of homebuyers extended themselves financially to purchase a house that might have been beyond their means. With the market on fire, people were likely to purchase with low introductory interest rates and interest-only loans. They believed that their income would increase to meet their payments and predicted that real estate prices would never fall. Sadly, adjustable-rate mortgages have adjusted and monthly mortgage payments have gone up. Couple that with the fact that income hasn’t increased, and you will see why more people are lagging behind with their mortgage payments.
As house prices diminish and with interest-only mortgages on the decline, more homeowners actually owe more on their mortgages than what their house is worth. It doubtlessly has occurred to many homeowners that this makes sense, as many are defaulting on mortgage payments as we speak.
Quick breakdown to explain the situation: you purchase a house for $400,000 that is now worth only $300,000. Thanks to an interest-only mortgage, a balance of $400,000 is still owed. If you erased this off of your balance sheet, your net worth will increase by $100,000. Granted, you’d still need a place to live, however from this point you could buy a more affordable home or rent for a small amount of time.
One giant downfall to abandoning your home. If you do, you will kill your credit rating, making it difficult or even impossible to get a new mortgage, rent an apartment, and even a job. There is a huge drawback to abandoning your responsibilities. If you walk away, you will destroy your credit rating, making it more difficult or impossible to rent an apartment, qualify for a new mortgage, and perhaps get a job.
Luckily, new legislation is out now to help families that are facing foreclosure, which will encourage people to pick alternative routes other than abandonment.
Mallory Megan is employed by a debt collection company. She also composes stories on business and finance, consumer spending and collection agencies.