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There are 15.7 million Americans who owe more on their mortgages than their homes are worth, according to Zillow.com, a site that lists foreclosed properties for sale. One of them, a Credit.com reader using the screen name “Adolfo,” wonders what he should do about that.

Adolfo and his partner owe $97,000 on the house, but it’s worth only $77,000, according to Zillow’s listings.

“I don’t want to give up my home,” Adolfo wrote in a response to a recent Credit.com story. “But at what point do I walk away?”

It’s often hard to know for sure when it’s right to stick with an underwater home and when it makes sense to give it up, says Gerri Detweiler, Credit.com’s consumer credit expert. But in Adolfo’s case, the temptation to give up the house is strong. The mortgage won’t be paid in full for another nine years, at which point Adolfo will be 64 and his partner 71. Their interest rate is nice and low — 4.5 percent. But as Adolfo says the home is “our main retirement asset.”

Since Adolfo and his partner are so close to retirement already, is that still the right investment? Or would they be better off letting the house payment go, moving into a cheaper apartment and investing the difference in something more secure?

“Deciding whether to “stay and pay” on a home that’s worth less than you owe is a tough financial decision,” Detweiler says. “While it’s fraught with emotion for most, there are a number of financial factors that you can and should consider.”

Here are some things Adolfo and others in his position can do to see whether it makes sense to cut-and-run or stay-and-pay:

Go Apartment Hunting

See what apartments and houses are available for rent in your area, and see whether you can actually save money, taking into account homeownership expenses like taxes, insurance and maintenance. “Get a realistic idea of how much you’d pay to rent,” Detweiler says, “so you can compare the cost of renting with what you are paying for your mortgage.”

Guesstimate

How long do you think it will take for your mortgage to equal your home value? “Until it does, you are effectively renting,” Detweiler says. Take expert advice into consideration, like Zillow’s latest Home Price Expectations Survey, which predicts a nationwide upswing in home values of between 3.3 percent and 10.2 percent over the next five years. Compare that with your own understanding of how your local housing market seem to be doing. If your city’s economy seems to be rebounding, it may make sense to stay and pay.

Weigh the Tax Hit

By giving up your house, you’ll lose the homeowner’s deduction on your taxes. You’ll also have to pay taxes on the value of the foreclosed home, since the IRS counts that as bonus income, and taxes it accordingly. You may be able to qualify for an exclusion from the tax, but applying can be cumbersome, Detweiler says.

Weigh the Credit Hit

Does Adolfo want to buy a smaller home or condo in the next few years? At least in the short term, a foreclosure will make that more expensive, and maybe even impossible, since it will linger on his credit report for seven and a half years. “As far as your credit is concerned, foreclosures, short sales and bankruptcy are all very damaging, Detweiler says. But if Adolfo plans no major credit purchases in the near future, that damage may not matter.

Image: Lomo-Cam, via Flickr

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