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When is it Time to Walk Away From Your Home?

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Our series about six options if you are underwater on your home has drawn a lot of comments. Some readers are wondering whether they should stay and pay or try to get out. Here’s a reader question we received this week:

I have been thinking a lot about whether to keep my home. I really feel like the place is a money hole. I paid $455,000 for my townhouse and the place across the street is selling for $150,000. I still owe $190,000.

I can afford to pay for the place but I feel like I could lose more money in the future. I tried to rent it out but found no promising tenants.

I really don’t know if I should keep it or not. I have a very long one and a half hour commute, and now I have a young child too. I am thinking about just renting a small place near work and starting over. Which of your six options are good for my situation? Please help! — Stuck in California

Dear Stuck,

I can only imagine how stressful this situation is for you, but I think you need more information before you can make a decision. You don’t need to go into “analysis paralysis” but you do need to investigate three things in more detail:

Find out exactly what kind of places are available to rent closer to work in your price range. Don’t just look online—go and look at some places and talk to the landlords so you can get a good idea what they require in terms of first and last, security etc. Get a good feel of whether you could rent an acceptable place for what you are paying now. (And of course check out schools since that will be an important factor with a young child.) If you are in a position to buy in another year or two, consider also looking at homes to rent with an option to buy.

If you discover that you’d have to pay a lot more to live closer to work, or if you can’t find something acceptable in a decent school district, you may decide that it’s better to stay put. Or maybe you’ll discover that for a little more you can get a decent place and save an hour a day in commuting time. You won’t know until you hit the pavement and check out what’s available.

Find out if you will be on the hook for a remaining balance. If it you have a non-recourse loan, the property is the only collateral for the loan and you can likely walk away without worrying that you will be sued for a deficiency. Many purchase money mortgages in California are structured that way. If you are not sure, make an appointment to talk with a real estate attorney who can review your paperwork with you.

Find out what your tax liability may be. Meet with a tax professional (an enrolled agent or CPA) with experience in handling 1099-C and 1099-A issues to learn whether you would owe taxes on the forgiven balance if you do a short sale or walk away. You may be eligible for the Mortgage Forgiveness Debt Relief Act or the other exceptions or exclusions I outlined in my previous article on this topic. This is an important question because you don’t want to be surprised with a large tax bill.

Read: 1099-C In the Mail? How to Avoid Taxes on Cancelled Debt

Since you bought your home for $455,000 and owe $190,000, it sounds like you’ve lost quite a bit of money that you put into it. That has to be a very tough pill to swallow. It also sounds like you are worried the value can go down further. It’s impossible to predict, though, how much further home values will drop or how long they will take to stabilize and then start going up again in your area. That means there is no single right or wrong answer here. Gather some more information and make the best decision you can knowing that at least you’ve made an informed choice to stay or leave.

Do you have a question for Credit.com’s Credit Experts? Submit it to creditexperts@Credit.com. We can’t respond to every question but we’ll choose the most relevant and educational ones to answer on the blog.

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  • Cindy

    I currently have credit card debt and I’m stressed and unable to pay the debt.

  • http://jamesrherman.newsvine.com James R. Herman

    What a waste of money. She paid $455,000. Clearly the materials and labor to construct that structure weren’t worth $455,000. It’s all psychological. That’s where America has gotten it wrong. If the housing market was free then I wouldn’t have spent 18 years in a mobile home park and this lady wouldn’t have paid $455,000 for her townhouse. They woldn’t be tearing down 1000 homes in Cleveland that got foreclosed and even the banks walked away from. It’s costing Cleveland about $12,500 per home and they have 20,000 more to tear down. I could’ve saved $45,000 if I could’ve just placed my singlewide on a lot and paid property taxes like everyone else. At least I didn’t flush a lot of money down a mortgage toilet as I paid off my singlewide in less than 2 years. I put most of my savings (less than $200,000) into single premium immediate life annuities so I’d have income for life. So when I lost my job in Oct of 2008 I executed plan B. I retired and moved 300 miles south to a lot where I now pay property taxes like everyone else and am saving about $3000/yr. That would be nothing to this lady but it’s the difference between living a life of dignity or being homeless. Isn’t it time we ended exclusionary zoning so people can live where they need to (close to their job) in a home that they can afford? If this lady is driving 1.5 hrs one way then that’s 3 hrs/day. Yikes! I moved when I had a 45 minute commute one way to the mobile home park so I’d only have a 15 minutes commute. So I cut out an hour a day. That’s 5 hours/week. I’d move because my quality of life is important to me. I’d rather have the extra 5 hours a week of free time. I hope this lady is saving some money. Just because you can afford something doesn’t mean you should buy it. How about saving and in effect buy financial security. Start buying single premium immediate life annuities so you’ll have income for life. And don’t go into debt and pay a lot of interest. Just borrowing $100,000 at 5% over 30 years means you pay $193,000. So she borrowed say $400,000 and will end up paying $372,000 just in interest. This just boggles my mind.

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