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Posted May 9th, 2012 under Underwater Mortgage

Are You Morally Obligated to Pay Your Mortgage? Issues to Consider When Evaluating Your Underwater Mortgage Options

Tags: strategic default, underwater mortgage help, underwater mortgage options

Are You Morally Obligated to Pay Your Mortgage? Issues to Consider When Evaluating Your Underwater Mortgage Options

When it comes to paying back money, many people take a pretty inflexible view: If you've received a loan, you're morally obligated to pay it back. Period. That attitude makes a lot of sense when you're talking about a personal loan you receive from a friend or relative. But it's less logical if you're a homeowner evaluating your underwater mortgage options. While it can be hard for some people to swallow, strategic default may be the best choice for dealing with an underwater mortgage, depending on your specific situation, of course.

Not surprisingly, banks want people to think that they're mortally obligated to pay back their mortgages. What the bank may not tell you, however, is that when it comes to the choices it makes (for example, a decision to short sell a commercial property), morality isn't part of the equation. The bank simply makes a decision that makes the most sense from a business perspective. As a homeowner seeking underwater mortgage help, it may be time to start viewing your decision about your underwater mortgage in the same waynot as a moral decision, but as a business one.

Now, that doesn't mean that you should simply stop sending mortgage payments to the bank. But it does mean that you should consider strategic default (in other words, walking away from your mortgage) as one of your underwater mortgage options, along with loan modification, short sale or simply staying put. The important fact to realize is that you need to make the best financial choice for yourself and your family. If it makes sense to stay in the home and continue paying the mortgage, even if you're underwater, then by all means do so. But if holding on to the house means draining your retirement savings or otherwise jeopardizing your financial future, walking away may be the right choice. If after careful consideration, you determine that strategic default is the best choice for you, then you shouldn't feel that you are doing something "bad" by doing so.

The decision to stop paying your mortgage isn't one that should be made lightly. Strategic default comes with potential legal and financial pitfalls. Depending on where you live, your lender may be able to come after you for a deficiency judgment (in other words, you could have to pay the difference between what you owe and what the bank was able to get for the house). In addition, a foreclosure is going to have a negative effect on your credit, and it will probably take five to seven years for your credit score to completely recover.

The bottom line? You may not have a moral obligation to pay your underwater mortgage. Instead, you should think about how to handle your mortgage as you would a business decision, evaluating the pros and cons and making the choice that makes the most sense for your situation. That's one of the reasons we created the Underwater Homeowner Assessment and Action Plan. We offer underwater mortgage help to homeowners so that they can make an informed decision about how to handle their underwater mortgage.