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Experts Give Advice On When to Walk Away From A Mortgage

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Sara Gilbert with GreenPath Debt Solutions (credit: CBS)

Sara Gilbert with GreenPath Debt Solutions (credit: CBS)

Written By Jodi Brooks

DENVER (CBS4) – As home values slip below what people owe on their mortgages people are strategically defaulting on their loans. In some cases, experts say it just makes economic sense.

So when do you walk away from your home? CBS4 consumer investigator Jodi Brooks looked into the issue. In Colorado foreclosure filings are actually down 25 percent from a year ago. But like everywhere in the country, there are struggling homeowners in the state.

So when do you keep paying your mortgage or default on your loan and walk away? Financial guru Suze Orman said, “If you are thinking about walking away from your house, doing a foreclosure or doing a short sale — now is the time to do it.”

Orman said everyone should be looking at the value of their home.

A homeowner owing $200,000 on a house, that’s now only worth $100,000, is underwater by 50 percent.

“If you have a home that is 50 percent underwater, 70 percent underwater, it will never ever come back to where you purchased it,” Orman said.

If you’re 10 percent to 20 percent underwater, keep making payments and ride out the housing crisis,” Orman said.

“Do the calculations everybody. How much is it costing you to actually stay in that house? How many years will it take you to pay more than what that house is currently worth? If it’s three years, four years, five years — are you kidding me — that’s a house where you really need to say bye-bye.”

Orman said to try to get the bank to modify the loan to lower payments. If the bank won’t, see if it’ll agree to a short sale, where it accepts less money than owed on the loan.

If the bank won’t do that, try a deed-in-lieu of foreclosure, where the homeowner signs over the rights of the house, sparing the bank the cost of foreclosure.

“(If) they won’t let you do that, walk away,” Orman said.

But Sara Gilbert with GreenPath Debt Solutions said, “It’s not that simple of a formula.”

GreenPath Debt Solutions is a nonprofit housing and credit counseling service. Gilbert said before walking away from a mortgage ask yourself some questions.

“What are your long-term goals? What do you hope to do? Where are you going? If you leave your home, where are you going to go? And how are you going to feel about that?” Gilbert said.

Orman suggests starting the conversation with the bank.

“You have to make the attempt to work with them. If they won’t work with you, then you – I think you can stand in your truth and leave that home,” Orman said.

Foreclosure does leave a large black mark on a homeowner’s credit rating. That black mark means the person won’t be able to get another mortgage for at least seven years.

When it comes to a car loan, forget about it. The person will have to pay cash for a car, and that’s likely true for other big ticket items like a big screen TV.

Think about credit cards as well. Existing credit cards should not be at risk if current on all the payments. If the credit card is with the same mortgage lender, it might be smart to open a new card with a new bank and make a few on-time payments before not paying the mortgage.

Know that cash is king. That’s how one will have to pay for everything if they do walk away from a mortgage.

Strategically defaulting is very stressful.

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