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.

Comments (9)
  1. Chris says:

    I find it disturbing that this story lacked any discussion whatsoever about the ethics of walking away from a mortgage.

  2. Laura says:

    What I find disturbing is that Wall Street sociopaths were allowed to eliminate all the mortgage regulations to the point where the next-door neighbor’s dog could qualify for a 100% mortgage. As for you, Chris and Number 6, feel free to go buy my property, which I walked away from since it is now worth $50,000 less than the loan. If you want to be judgmental, go right ahead. As for me, I carry no guilt walking away from a ridiculous situation that I did not cause. You have no right to judge anyone else. But if it makes you feel superior, more power to you. Why don’t you do the Dana Carvey “Superior Dance” right now? It’ll make you feel better!!

  3. Mike Jonett says:

    The report about not getting another mortgage for 7 yrs or not getting a car loan are not true. After our business failed we filed for bankruptcy in Oct 99 and were granted the petition in Jan 2000. Shortly thereafter we were both working again and obtained a car loan in May 00, 5 months after the bankruptcy. We also obtained a mortgage and bought a house Aug 2003, a little more than 3 yrs after filing.
    Much of the story is scare tactics to keep people from walking away so bond investors keep getting their investment and interest back. Businesses such as the Mortgage Banks Assoc and bailed out Wall Street firm Morgan Stanley have walked away from property. Walking away is a financial decision for the owner. banks and businesses do it all the time.

  4. denvervet says:

    Ok, none of these so-called “experts” have to deal with your credit and problems associated with walking away from a house……….nuff said.

  5. annoyed says:

    I completely agree with number 6 and Chris, but Laura I am confused, you said you are in this situation that you did not cause? Have you ever done anything wrong? So it is Wall Street fault that they financed your dog but your dog could not make the payments? Maybe it’s your dogs fault then!!

    and then Mike i believe bankruptcy is dealt with much different now then in the early 2000’s

  6. Rick T. says:

    The fact that the author of this story referenced Suze Orman is enough reason for me not to give it any credibility what so ever. That woman is the reason why duct tape was invented, to silence her piercingly irritating big mouth. This is seriously one of the most useless stories I have ever read on this website. It really severs little purpose.

    This story states nothing but simple financial common sense. Anyone who doesn’t know this garble already should not own a home in the first place. Any home owner should know before you sign your life away to the bank that your home will never be an investment. Any person looking to own a home should be on a fiscal mission to complete home ownership within 10 years, meaning that you should take a mortgage with the full intention of living a life style that allows you to pay that loan off long before the 30 or 15 year maturity date. Ideally, you should not even buy a home unless you can pay cash, buy unfortunately, that is not realistic for most people. I admire the advice from Dave Ramsey, he is one of the few financial personalities that gives realistic middle class advice to the average Joe. He just needs to leave all his religious garbage out of his financial advice.

  7. Deb says:

    I did a strategic default and one year later my credit score was back in the 700s. Sorry, you can guilt me all you want, this is a financial decision, not an ethical decision.

    1. Laura says:

      Right on, Deb. I walked away from my condo that is now worth 1/3 less than I paid. Others can judge me all they want. Continuing to pay on nearly $50,000 of nothing was not a wise financial decision. As for those who think I should, I invite them to pay $60,000 for a car that’s worth $10,000 for 20 years, and see how it makes THEM feel. Anyone who judges us is probably not severely underwater with their house. The judgmental people can go jump in a lake, far as I’m concerned.

  8. Dave says:

    Does this same formula work when it is a condo you are no longer living in, but renting? I just break even with the rent, but the value of the condo is substantially down and will never get back to where it was.

    I hate being a landlord and would love to eliminate this burden if possible.