Would you Walk Away from a Mortgage?

Posted by Mrs Money on August 10th, 2011

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The other day I was talking with a friend about how we pay so much each month for our mortgage payment, yet maybe 10% goes towards principal.  It’s frustrating, and often makes me dream of selling my house and being mortgage free.  Of course, then we’d have to pay rent and who knows if that would be better for us.  I told her how I had been paying extra on the principal to reduce the amount of interest we end up paying and to shorten the length of our mortgage.  She had some objections, and I listened to her while taking mental notes.  Here’s what she thought about us paying extra on the mortgage:

-Because we don’t plan on staying in this house forever, she thought it would be in our best interests to stop paying extra on the mortgage and to start putting that money elsewhere.  Maybe a Roth IRA, investments, etc.  Over the long term, she thought it would be better if we invested the money over it being tied up in (maybe) equity in the house.

-There’s not really a way to get the money back that you pay extra on your mortgage unless you take out a home equity loan, and that’s not really something I ever want to do unless it was an emergency.

-Cash is king.  If we take the extra money we’d be putting towards the mortgage in a savings account, we’d have access to that in case of an emergency.

-If our house value ever dropped dramatically and we wanted to walk away from our mortgage, the less money we had into the house, the better.  I don’t know if I could ever walk away from a mortgage, but with the economy roller-coastering like it has been the past few years, who knows what will happen with home values.  I don’t want to be stuck with this house and not be able to move or sell it.

I can understand why people would walk away from a mortgage.  My parents’ house in Michigan was worth at least $240,000 at one point and now is probably worth less than $100,000.  Had they had a mortgage on the house, it probably wouldn’t be worth paying the payments on a house they probably would never recoup the money.  Of course, their house has been paid off for years, so they’re only screwed if they go to sell, which I don’t see them doing in the near future.

Do you think you would ever walk away from a mortgage? What circumstances would cause you to do so?

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14 Responses to “Would you Walk Away from a Mortgage?”


  1. Christina says:

    Newbie to this “grown up” financial business… what do you mean by “walk away,” go into foreclosure?

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  2. Christina says:

    Sorry for the second post, I forgot to check notify me!

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    Mrs Money Reply:

    I did mean foreclosure :) I should have been more clear. Sorry about that!

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  3. Kacie says:

    I think you’re tackling two topics here. One is whether you’d walk away if you were upside down or in a bad financial place, and the other is if paying extra on the mortgage is worth it.

    The argument that people shouldn’t pay extra on their mortgage if they are planning on moving doesn’t make sense. You will get that money back at closing. So…I guess they are just thinking you could keep it more liquid in the meantime? idk.

    I don’t know how much we will prepay on our mortgage. The rate will be really low. We will be better off to throw more at retirement and child’s college savings. Our rate will be 4.75% and we will get a 20% tax CREDIT back thanks to the mortgage credit certificate program from Indiana on our federal taxes.

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    Mrs Money Reply:

    Kacie- I guess what her point was that if you pay the extra on the mortgage you’re not guaranteed to get the money back at closing if your house is worth less than what you paid for it/what you can sell it for.

    4.75% is awesome. Ours is at 5.59%. I have thought about refinancing but I don’t think it would be worth it for us. Hopefully I won’t regret that in a few years! That’s awesome you guys will get a tax credit!

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  4. R. says:

    We are walking away from our mortgage. We owe $100,000 and its now worth $30,000. The house next door just sold for $22,000. Since the market collapse our neighborhood has turned into a very bad area. We cannot sell for anywhere near what we owe. It’s a gut wrenching feeling, but we feel unsafe. With the cheap sales come investors who put in renters and I’d say a good 90% of these renters have had run ins with the law since moving in. We’ve had 3 shootings since rentals took over. It’s not always about financial responsibility, sometimes you need to take your families safety into account and that’s what we’re doing. We are attempting a short sale but have had little luck from our mortgage company. We’re still trying, but if we end up foreclosing, so be it.

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    Mrs Money Reply:

    R- Ouch. That is horrible. I don’t blame you one bit. I don’t see that you really have any other option! I wish you the best- hopefully it will all work out perfectly for you.

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    Kacie Reply:

    I’d probably do the same thing if I was in R’s situation. Really…safety is important.

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  5. LivingOurWay says:

    I don’t think I could walk away from our mortgage without feeling terribly guilty. I did a post on this about a year and a half ago that you might find interesting:

    http://www.livingourway.com/2010/04/what-will-you-do-with-your-money-during.html

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  6. Becky R says:

    It is hard to say not being in that situation. I don’t want to say I never would as I hope I never have to, but who knows.

    The best answer is prevention, do not buy a house without at least 20% down, with the smallest (not biggest) payment you can afford, and pay extra on principale every month, so hopefully you will pay off your mortgage and not have to worry about what you owe or the value.

    If you don’t need to move or plan on moving and can still afford payment it is irrelevant what your house is worth.

    I have friends who bought a house (when prices were high) for $300,000. They put $60,000 down. Currently they owe about $230,000, but the house is now only worth $180,000-$200,000. Their circumstances of jobs and such are exactly as they were when they bought the house, yet they may walk away and let the house go into forclosure. They still need to live in this area and still need house. They are still making the same amount of money. They want to walk away to quickly (before their credit is ruined) buy another house. I think this is irresponsible. Also the have his parents as co-signors on their mortgage, so if they walk away his parents are screwed. Who would do that willingly?

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    Russ Reply:

    I agree with Becky. People who are in safe neighborhoods with the same (sometimes better) income are worried about being ‘underwater” with their mortgage. Our house is ‘worth’ 30k less than what we bought it for, but its true value is the roof over my family’s head it provides! So unless I had a true NEED to move (family safety, etc) my house is my home.

    Along the lines of paying extra to your house: We have been applying my wife’s WHOLE income as extra principle to our house. If I had put all that money into the market and pulled out in Jan-Feb 2011 we would have been 30%. But I didn’t pull anything out and the fact is that today we are 10% down. Our current plan will have the house paid off in a total of 8 years (of a 30yr loan) with a total interest savings of $160k. Guaranteed.

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  7. Why is it OK for the banks to screw over the taxpayer via bailouts, but not ok for a particular individual taxpayer to screw over the bank, via a contract which the bank agreed to?

    I would not walk away because of a small loss, but if I was more than double the value underwater…. I’m not in that situation so it’s hard to say, but I don’t think I can blame the people who do, even if they did make a bad choice in the first place getting in over their heads. It goes both ways… the banks are happy to repossess over the slightest missed payment when the times are good.

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  8. Emily says:

    We paid off the balance of our mortgage last year. Why? We crunched some numbers, and figured out we come out ahead in our investments that way. Why? We are paying ourselves the interest, and not the mortgage company.

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