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What's the Strategy?

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Posted On: 04/06/2011

Question: With virtually everyone going negative in their homes these days, and things looking worse as time goes on, I am looking for some honest help on what to do.

We have a home purchased in 2006. We can easily make the payments and have good jobs, but that doesn't really make sense. We're considering a strategic default, short sale, fire sale or something. Should we walk away?

Answer: In your situation you have a property bought five years ago which is now worth less than the outstanding mortgage balance. You are financially upside down.

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This is naturally an unhappy situation but how unhappy is it?

You have shelter you can afford. This puts you very much ahead of millions of people who have toxic loans and monthly expenses they can't pay.

You have income and that puts you in a better position than the millions of people who are unemployed or under-employed.

But why move? You're perfectly positioned to stay where you are without any damage to your finances or credit.

In a short sale a borrower sells a home under the condition that the lender takes a loss on the loan. Now imagine that the value of your home went up. Would you voluntarily offer the lender more money because of your good fortune? Why then should the lender take a loss when values go down?

If you walk away from the property the lender in many states may have grounds to pursue your other assets with a deficiency judgment. The economic benefit of a new and smaller mortgage will then be offset by the potential for litigation, remedies and damages.

The better approach is to keep paying your mortgage and see if you qualify for a loan modification at today's rates under the government's Home Affordable Refinance program. This plan is designed precisely for borrowers with good credit, little equity and even negative equity. Speak with your lender and see:

http://www.makinghomeaffordable.gov/refinance_eligibility.html.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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