Are people just better off walking away and starting again?

This discussion began to get heated in October, when there was an article published on the Wall Street Journal blog written by an economics professor that stated that homewoners should walk away from their mortgages, in certain circumstances.  In “It’s OK to Walk Away, A Law Professor Argues“, there is an argument that walking away from your mortgage is more of an emotional or moral issue than a financial one. People feel as though they have a moral or ethical responsibility to stay in a home they can no longer afford or is “underwater.”

Today there was another article published by WalletPop, called “Is It Immoral To Walk Away From An Upside Down Mortgage?”, which discusses this topic one more time. The author discusses the issue as not so much a financial one but more of a moral and ethical decision. Homeowners need to accept the fact that they cannot afford the house any longer and make a decision to walk away.

There are many arguments on both sides of the argument. There is no right answer for everyone. There is no one who can make a decision of this magnitude for anyone else. There are definite financial consequences if you walk away from your mortgage. There will be severe damage to your credit score and your financial history. It will make it difficult to get credit or even rent an apartment for some time. However, there may be worse financial consequences if that homeowner stays in the house and lives off their credit cards to get by every month and ends up in foreclosure anyway.

The moral and ethical consequences can also be severe. People associate their homes with their families and their self-worth. They think that walking away means they are a failure. They have failed their families and themselves. However, walking away may help them save their families.

Before anyone walks away from a mortgage, there are many different factors that need to be considered. If you feel as though this may be something you are considering, you need to talk to a professional, either an attorney or a financial advisor, who may be able to help you make the right decision.

I know that this is a topic that people feel very strongly about.  What do you think?

As a homeowner, here are some of the expenses you will experience:

1. Homeowner’s Insurance

2. Taxes

3. Emergency Repairs and Home Improvements

4. Landscaping

5. Utilities

When determining your budget you need to keep these things in mind and plan accordingly.

Lenders are currently only willing to lend an amount where the monthly payment, including taxes and insurance, equals up to 38% of your gross monthly income. FHA loans stretch these numbers somewhat and you may be able to find a loan program willing to lend up to 42%  of your gross monthly income. We suggest that you use bankrate.com where you will find multiple calculators that can help you determine what you can  afford.

The biggest mistake people made in the past is that they purchased houses based on the current payment and then found that once the loan began to amortize or the interest rate increased, they could no longer make the payments. We suggest that you get a fixed rate loan and have a cushion each month that will allow you to save for the inevitable extras that come with home ownership.

The ability to make payments and comfort level associated with this type of decision is wholly personal. Many people find that they need to have extra money every month for a new car payment, vacations, and other expenses that, although not required, are enjoyable. Lenders do not look at these additional expenses and do not take into account anything but income and credit score when determining your loan worthiness. This puts the entire burden on you!

Make a budget. There are many sites where you can create a budget for yourself, such as Mint.com and Yodlee.com. 

When you are looking at your budget anticipate what you believe the expenses in the new home will be. After the budget is done and you deduct your mortgage payment, make sure there is enough left to save a little and cover those emergencies that inevitably pop up from time to time.  Seek professional help from a financial planner or accountant who will be more than happy to help you work on your budget.

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