During the real estate boom, a lot of homebuyers extended themselves financially to buy a house that may have been beyond their means. With the market on fire, people were likely to purchase the house 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. Unfortunately, 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 have fallen behind with their mortgage payments.
With house prices falling and interest-only mortgages decline, many homeowners owe more on their mortgages than what their home is worth. It obviously has occurred to many homeowners that this makes sense, as many are defaulting on mortgage payments as we speak.
Here's a quick breakdown to explain the situation. You buy a house for $400,000 that is now worth only $300,000. Thanks to an interest-only mortgage, you still are in arrears for $400,000. If you eliminated this off of your balance sheet, your net worth will increase by $100,000. You'd still need a place to live, but from this point you could purchase a more affordable house or rent for a bit of time.
However there is one large drawback to abandoning your house. If you do, you will trash your credit rating, making it difficult or even impossible to rent an apartment, get a new mortgage, 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.
New legislation has been released to help families facing foreclosure, which will try to educate people to pick options other than abandonment.
Mallory Megan is employed bya debt collection company. She also does articles about consumer spending, business and finance, and debt collection.
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