A reader considers a strategic default on her home mortgage loan.
Q: I am pushing 73 and my house is underwater. I have a first loan of about $140,000 and a second loan of about $18,000 with a 7.85 percent interest rate. My second loan has a balloon payment coming due soon. I was lied to about this loan having a balloon payment.
Neither of my current lenders will work with me to refinance the loans and I can’t find another lender to help either. I always pay on time, have never paid late and have great credit. I paid about $200,000 for the home and it’s now worth about $135,000.
I’m thinking of just walking out and renting to cut down on my monthly expenses. All of these thoughts bring a moral issue to me and it goes against all I know that is right in the world.
I just want a lower interest rate and it amazes me that no one will help me. It seems illogical and unfair to me that the only way I can get help is to stop paying on my mortgage. What is the worst thing that will happen to me if I just give it back to them since they will not work with me? I have been told by several lenders to stop paying my mortgage, bank the savings and walk out to help myself.
Credit is not my major concern at this point in my life. Any other concerns I should be aware of if I garner up courage to just walk out? I’m not sure I can do it and live with myself but I feel I have to protect myself from these people.
A: We’ve answered this question a couple of times in the past, but your question has an interesting twist to it. It appears that you can afford your mortgage payments but did not know that the promissory note on your second mortgage has a balloon payment.
A balloon payment is a reference to a loan that comes due at some time after five or seven years and at that time you must repay the entire amount that is still owed on the loan. With a customary home mortgage, you have that loan for 15 or 30 years and the payments you make over the length of the term result in a zero balance at the end of the loan term.
Obviously, we don’t know the circumstances from the time you obtained your loans to know what type of a loan you were getting – or thought you were getting. However, in just about all the cases we’ve seen, the borrower is given loan documents to sign at the closing and the borrower has the opportunity to review those documents.
While most borrowers don’t read all of the terms and conditions of the loan documents, many do, and all of them should.
If you read your documents carefully, you’d see how much is the interest rate for their loan, how it works, whether the rate can change, whether payments can increase or decrease and by how much, when the loan is due and whether the borrower will have to make monthly payments to the lender for real estate taxes and insurance, and, finally, what the costs should be to obtain the loan.
These basic facts, which are all laid out in the first few pages of the loan documents, should be the minimum information that a borrower should know and understand by the time he or she is looking at the loan documents for the first time.
If you were lied to on this issue or the documents you signed are not the documents that were recorded for your loan, you should seek legal counsel on that issue.
Now on the issue of walking away from the mortgage, that seems to be a loaded question these days. The term people are using for borrowers that decide to walk away from their homes and mortgages is a strategic default.
There are readers that take exception to the advice that you can and should walk away from a mortgage obligation. There are other readers that believe that a borrower has entered into a contractual obligation to make payments on a mortgage and if he or she decides to stop making those payments, then the only issue for that borrower is the consequences of the default on failing to pay the mortgage.
The moral question of making or not making the payments is a personal one and you will have to make that decision on your own. A contract is a legal document, not a moral one. Your actions may affect other people in your neighborhood. If you walk away, you force the lender to foreclose on your home and affect the home values of others in your neighborhood.
While your obligation to make your payments under the mortgage is strictly a legal one and a lender can’t go after you for the moral issues involved, only you can deal with the moral issue and how it affects you.
It’s interesting that you didn’t indicated that you couldn’t make your payments but rather that you wanted a lower payment and you wanted one mortgage rather than two.Given the value of your home, it’s understandable why lenders are unwilling to give you a new loan. While for some years lenders were willing to overlook just about everything and anything during a loan application, most lenders today have gone the other way. Lenders will scrutinize every detail of an applicant’s finances, credit history and credit score. Lenders will also make sure that they have a good and valid appraisal for the property that is being financed. And, finally, lenders will seek to give their best loan terms to borrowers with the best credit and those that borrow at most 80 percent of the appraised value of the home.
While you may feel these terms are unfair to you, the financial system is still trying to correct itself from the imbalances of the last ten years.
If you end up walking away from your home and the obligations you have to repay your loans, your credit history will take quite a big hit, your credit score will drop substantially, and, depending on where you live, your lenders may have the ability to sue you and attempt to collect any amounts you might still owe them after they foreclose on your home and sell it to satisfy whatever portion of the debt they can. The amount you still owe is called a deficiency and the judgment the lender can get against you in court is usually called a deficiency judgment.
In addition, you may find that no lender will give you a loan for the purchase of a home for the next five years or so. But if you don’t need good credit, then none of that will matter.
Please write to us and tell us what you decide to do and why.