Is It Ever Right To Abandon Your House?

[Jul 22, 2008.]

Often, financial decisions acquire a moral undertone. Ever since the Protestant Reformation took hold Europe's merchant classes, fiscal responsibility has been viewed as close associate of godliness. Nowhere is this mentality more apparent than when it comes to paying off a mortgage loan.

The hearth and home are viewed as the prerequisite for family. As consequence, many people have the idea that you need to pay off your mortgage no matter what. People who couldn't afford to make their monthly minimum payments have been known to raid their retirement savings, or borrow heavily from credit card companies at exorbitant interest rates. The problem is that these actions tend to make people worse off financially than they were before.

You've made that one payment on your mortgage, sure. You've cleared one debt. However, if you've used your credit card to do it, the interest rates on your credit card are going to send you spiraling into greater and greater debt than ever before. It's only a matter of time before you owe tens of thousands of dollars and your credit runs out--suddenly, you're having to sell off that house anyway, that house you worked so hard to buy.

If you've emptied your retirement account to pay for your house, you've essentially guaranteed yourself a life of penury for your supposedly "golden" years. You won't have a job, your meager social security checks will barely cover your gas and groceries, and that house you've sold your entire retirement to buy is going to be impossible to pay upkeep on. Yes, you've paid off your mortgage--only to find yourself needing to sell your house twenty years down the line.

There's talk going around of people who default on their mortgage payments when they don't have to--who renege on their promise as borrowers as soon as their homes go down in value. However, by and large these are legends. Banks and other financiers try to clear their names and say that borrowers are responsible for the recent housing crisis.

In fact, banks and borrowers are equally "to blame" for allowing themselves to get sucked into the housing bubble of the past decade. Financiers offered home buyers mortgages with payments calculated to start cheap and get prohibitively expensive over a short period of time. Home buyers accepted the risky loans, assuming that real estate will continue to go up in value. They counted on being able to sell the house for more than they paid for it, never having to deal with the troublesome mortgages in the first place.

After real estate prices finally fell, many borrower found themselves in the position of actually being unable to afford to keep making their mortgage payments without seriously hurting themselves financially.

The fact is, if you have to forgo your other financial commitments in order to pay for your mortgage--such as sending your children to college, saving for retirement, or paying for your car--you need to think about the possibility of foreclosure. Otherwise, more likely than not you'll simply be putting off the time when you will absolutely have to sell your home.

First, of course, look at the available options. If you can work with your lender to put together a viable payment plan that will let you keep your house and fulfill your other obligations, by all means do so. But if your mortgage payments take up most of your income, call or find a good bankruptcy lawyer.