Archive for June 11th, 2011

When it Makes Sense to Stop Paying Your Mortgage

The following was a question/comment I received from a subscriber.  It’s a great question, as there are undoubtedly many people in this situation.  So I’m posting the question (anonymously) and my answer for all to see.  

Question:  My husband and I are retiring in about 5 years.  We’re underwater in our home by at least $150,000 (and we realize there is no way our home will rebound in that short window).  I’m also facing permanent disability from my job in the next year or two so our income will be substantially reduced.  We’re wondering if we would be better off to stop paying our mortgage, line of credit and HOA dues?  That would be a savings of $2,275.00 that we could set aside in a savings account.   Could a deficinecy waiver take that money down the road?  Even if we bought a small home out of the state of Florida?  Would appreciate your advice

My Answer:  I firmly believe (and have said so on this blog many times) that if you see the day coming, whether it’s next month or in two years, when you know you’re not going to be able to afford your monthly mortgage payments, then it’s probably better to stop paying now, rather than later.  Otherwise, you’ll deplete all your savings and still get sued for foreclosure (and wind up with no home and no money).  For instance, if you pay for the next two years, you’ll have paid about $48,000 (instead of having that money in your pocket) and, once your income decreases, will still get sued for foreclosure.

By contrast, if you stop paying now, you’ll be able to accumulate some savings, putting some money in your pocket instead of the bank’s.  Down the road, you may use that home to buy another home, or whatever else you may choose, and if you make that home your homestead, it should be homestead protected (in Florida, anyway).  I view that as a totally legitimate strategy.  What’s the alternative?  Spend your last dime on your mortgage, knowing you’re entering your retirement/disability years, and get sued for foreclosure anyway?  

You’re right to be concerned about deficiency, but don’t fret.  It’s quite possible you could get a deficiency waiver (particularly if the bank gets weary of trying to win a foreclosure case that we are vigorously defending).  Also, even if a deficiency is entered, it may not matter – you’ll have your homestead and be retired, so a deficiency may not be collectible anyway. 

I do note that it’s generally a bad idea to stop paying association dues, for a variety of reasons.  First, the amount you owe is much smaller (than a mortgage payment), so paying isn’t as much of a problem.  More importantly, if you don’t pay, associations tend to be very aggressive in prosecuting a lawsuit, often with a foreclosure, and those cases are often difficult to defend.  Let’s put it this way – what good does it do avoid foreclosure by a bank if the association forecloses on you in the meantime?  Plus, association dues have a snowball effect.  A $2,000 balance quickly becomes $4 – 5,000 or more with late charges, interest, and lawyer’s fees.  In my view, it’s not worth retaining a lawyer to fight over amounts like that (if you can avoid it).  Basically, it’s better to pay the association dues as they accrue to ensure you don’t get foreclosed by the association during the pendency of the mortgage foreclosure suit. 

Mark Stopa

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