Home > Mortgages > When is it Time to Walk Away From Your Home?

Comments 2 Comments

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.

Image: silent(e), via Flickr.com

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • 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.

  • Pingback: Why Are Short Sales So Bad for Your Credit? | Home Loans CA()

  • Pingback: Do I Have to Pay Taxes on a Foreclosed Home? | Best Credit Repair()

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team