Walkaway's Catch-22

Q: As a single woman a couple of years ago, I bought a loft with a 5/1 adjustable-rate mortgage (ARM) and no money down. My mortgage will start adjusting in about two years, and I am now about $50,000 upside down. In the meantime, though, I've gotten married (my husband is not on the loan) and we'd like to have a child soon, which won't work in the loft.

We are thinking of walking away from the loft and getting some closure on it, so we can move into a home that makes sense for our family. We're also thinking about trying to get a loan modification, although I'd really rather not hold on to the loft. And some people we know have recommended a short sale. I feel like my past decision to buy the loft with that ARM trapped us in this situation. But I also want to know what to do now so we don't get trapped again.

A: Between putting no money down and the depreciation in value, you now find yourself, like almost 30 percent of your fellow Americans who own homes, owing more than your home is worth. Somewhat more rare about your situation, though, is the fact that you also are having a major change in lifestyle situation that renders your home less feasible to hold onto, even if you were willing to do so to wait for the value to rebound.

You might have found out that it's very tough now -- and impossible, for many -- to qualify for an additional mortgage for a more suitable home, unless you have income (rental and otherwise) to more than offset the expenses of owning both homes. Hence, you feel trapped: You need to move on, but can't sell the home for what you owe on it.

Whether walking away is the right decision for you is not something I can tell you -- it depends on your personal situation, including what state your home is in and the resulting ramifications of foreclosure, which do vary by state.

Foreclosure is a traumatic experience, emotionally and otherwise, and walking away implicates the ethics of going back on your word to the bank. However, there is a countervailing point of view to the effect that, in the words of a colleague of mine, your highest ethical obligation is to your family, not the bank.

In my latest, free white paper, "REThinking the Walk Away," I deeply explore the issues you should consider before deciding to walk away.

Here's my advice. Reflect on how you got trapped in the first place, and how there were some things in your control (your downpayment, loan choice, etc.) and other contributing factors (like the market's dramatic decline) that were not. The point of this analysis should be to scrape every single lesson out of your experience.

The point is not to create a guilt complex, chastise yourself or fixate mentally on what you would have done differently. In fact, many homeowners I know have conducted this analysis and concluded that, if they could do things over again, they would probably not do a whole lot differently, but in the future they might operate more conservatively with their real estate and mortgage decisions (or not!). ...CONTINUED

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