If all the stories in recent months about walking away from your mortgage are to be believed, the practice of not paying this once-sacred obligation has become, if not quite acceptable, then at least understandable
. Whether a person is underwater on his or her mortgage, is unemployed, or both, when you listen to the reasons why they decide to give the house to the bank, it actually starts to make sense.
But the costs aren't always apparent.
If you paid $250,000 at the top of the market three years ago, with a 5 percent down payment on a home that is now worth $150,000, why would you continue paying a mortgage that is more than the home is worth? Why not walk away, find a nice rental, and wait out the downturn while you do everything you can to repair your credit rating?
"We've seen an increase in the number of people contacting us about it," said Jon Maddux, CEO of YouWalkAway.com
. His company, for a fee, counsels people on how to implement a strategic default (a voluntarily walk-away) from their mortgage. "People have tried other options -- whether it was a loan modification, a short sale -- and it didn't work. This is the next phase."
Still, says Maddox, "We know it's not for everyone. We prefer they try other options if they can before simply walking away. There's more strategy to it than just not paying the mortgage and waiting for the bank to foreclose."
Indeed, there are several reasons, say experts, to continue paying your mortgage. The consequences, they say, can go beyond the ignominy of not honoring your obligations and the hit to your wallet.
1. It Hurts Your Credit Rating
There is the not-so-small matter of your credit score. Your credit score affects a multitude of things, from the interest rate on your credit cards to how big a down payment you will need on a home. While some people take comfort in the fact that once they are free of mortgage debt, they will be able to pay all their bills and clean up their credit score, it doesn't quite work that way. Once you default on a loan, especially one that you could have continued to pay, "it could be well over seven or eight years before [you] are able to obtain a mortgage to buy a home again," Jay Brinkmann, chief economist for the Mortgage Bankers Association told CNNMoney.com
Even if a lender decides to take a chance on someone who has walked away from a previous mortgage, larger down payments and higher interest rates might be necessary to qualify.
2. You Are in Danger of a Deficiency Judgment
While homeowners who walk away might assume that they are in the clear once the bank sells their home, they could be mistaken. In some states, lenders can sue you for the difference between what you owe on the loan and what the bank sold the home for. This is known as a deficiency judgment.
"If you live in a recourse state, then the lender can sue," said Maddux. "In some states, they can take up to five years to sue. That's a scary thing, although we've seen very few deficiency judgments." In Florida, which is a recourse state with a lot of homes underwater, lawyers are actively pursuing
those who have walked away from loans simply because they were underwater.
3. You Might Be Hit With a Big Tax Bill
Even if you have successfully negotiated a strategic default, you might need to pay taxes on the amount you did not pay back to the lender.
The IRS' FAQ on Home Foreclosure and Debt Cancellation
states that "if you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes."
While bankruptcy, insolvency and non-recourse loans are not taxable, there are instances in which you will owe taxes on an unpaid mortgage. If you refinanced your mortgage, and used some of that money for something other than home improvements -- whether it was for college tuition, paying off credit cards, or a second home -- you can be taxed on that money.
The bottom line is that walking away from a mortgage "is not something to take lightly," says Maddux. "One of the worst things a person can do is put the key in the mailbox and move out," he says. "If you are struggling to stay in your house: get legal advice, get professional advice. It's better for everyone if you stay and work something out."