Don’t pay your mortgage…

Bad debt advice?

In these desperate economic times there is all kind of bad debt advice out there.  Have you heard this one?  Don’t pay your mortgage.  The thinking is that this action will force  your lender to help you with some sort of workout plan or loan modification.  While there may be validity with this logic it can also backfire on you really bad.  You are literally playing chicken with your lender.  What’s at stake… your home.

If you can pay your bills you should.  If you can’t pay them, then….don’t.

Pros:

1. Forbearance:

The lender may take a more serious look at your situation and try to work something out with you like a forbearance which is where the lender pushes your arrears to the end of the loan.  For example, let’s say you are $20,000 behind on your payments the lender can either include that in to your loan amount or you may not owe that money until the end of your normal loan.  This is essentially like a balloon note.

2. Loan Modification:

The lender may realize you truly are experiencing a financial hardship and it may be in their best interest to help you with a loan modification.  Which is where they will reduce your monthly mortgage payment based on a ration to your income.  They can lower your interest rate, extend your term and offer you a principal forgiveness (not likely).

3. Save money

You will be saving money every month that you are not paying your mortgage.  Although having more money in your account may be good for the short term there may be longer term negative consequences.

4. Partial Payments

If you are having a temporary setback in your finances and you can pay most of your mortgage then ask you lender if you can make partial payments.

Cons:

1. Damage to credit score:

Your credit score is getting hammered.  Once you go 30 days late on any of your credit accounts it drastically impacts your credit score

2. Late Fees:

You are incurring late fees, penalties and eventually attorney’s fees

3. Foreclosure

You can get foreclosed on and now your homeless.

4. More unaffordable

The lender may amortize the back payments in to your monthly payment which will make your already unaffordable mortgage payments even higher.

5. Blight

If you are foreclosed on it will hamper the valuations of your entire neighborhood.

6. Bankruptcy:

You may have to file bankruptcy.  If you are foreclosed on and you live in a recourse state you may get sued by your lender for the difference they received in the foreclosure or short sale vs. what you owed them.

7. Home sold

You may get to a position where you have no choice but to sell your home if there is equity or short sale if your home has negative equity.