Underwater! Should I Stay or Should I Go?

Are you “underwater” on your mortgage, or close to it? That is, is your outstanding mortgage balance greater than the current value of your home? If you sold your home, would you most likely receive an amount that would not allow you to pay off your mortgage balance?

There has been frequent discussion in a variety of periodicals of whether it is acceptable for those who are underwater to just walk away from their mortgages. Can’t they simply stop putting money into something that is worth less than the mortgage itself?

The short answer, in my opinion, is no. However, there are at least two ways to look at things.

The simpler of two situations is the one where the homeowners simply cannot make their payments. For whatever reason, there just isn’t enough money to make the full monthly payment, or there is not enough money to make any payment at all. Bottom line: the homeowner is behind on payments and getting further behind every month.
The first thing to do is try to make some arrangement with the bank holding the mortgage. See if the bank will adjust the terms of the mortgage or agree to a modified payment schedule. Alternatively, try to sell the house outright or try to get the bank to agree to a short sale.
If nothing can be done, then foreclosure may be inevitable. Get ready to move out of the house.
This is a situation where the homeowners are not really walking away. They are not able to do anything to address the situation. Leaving the mortgage behind is basically involuntary.

The more complicated situation is the one where the homeowners are able to make their monthly payments. However, they question the wisdom of doing so given that they are making payments on something that is worth less than they owe and for which there is not currently a reasonable expectation of getting their equity out of the “investment”.
Wouldn’t it be better to walk away and save the money rather than throw it down a hole? Then rent a home instead or, if financially feasible, buy a different house that is undervalued where you won’t be underwater. Or use the money for something else altogether.

The consideration in this situation is really a moral or ethical decision. Homeowners have a contractual obligation to make their payments. If they have the ability to make the payments, not making the payments because they see no point in doing so, or because other people are walking away from their mortgages, is wrong, plain and simple.
Those who want to move, or need to move, may just have to wait and ride out the storm. Or, it may be necessary to settle for selling a home for less than desired, maybe a lot less.

One other consideration: Those living in homes they actually want to remain in really have no need to worry about being underwater, at least in the short term. Eventually (hopefully) the home’s value should recover.

If you are in an “underwater” situation, do the right thing. If you know someone in this situation, encourage them to do the right thing.

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