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Is it Wrong to Default on My Mortgage?

Is it Wrong to Default on My Mortgage?
Pat Dickson - Fri Jul 13, 2012 @ 06:44AM
Comments: 0
My answer is no. It is not wrong to default on your mortgage.

Let me clarify. First, this is my opinion. Many disagree with me. Second, in my opinion, there are consequences to defaulting on a mortgage, but there is no right or wrong about it. Why? Because the option of mortgage default was, and always has been, part of your original loan agreement with your lender.

Mortgage default is nothing more than a fair and reasonable choice you and your bank have always agreed was available to you.

mortgage default is not evilLet me explain. When you shook hands with your banker, and signed on the dotted line for your home loan, there was a mutual agreement that you had the option of not making your payments. Per your contract, you were allowed to default on your mortgage, and as a result, your banker had a right to take your home away from you. If you didn't make your payments, you faced foreclosure and you lost your house. Simple as that!

See? A mortgage is just a contract with two choices for you to make. You can make your payments, and one day the house will be yours. If you don't make your payments, the bank forecloses on you and you lose your house to the bank.

But aren't you still really ripping off the bank? No.

When the bank originally loaned you the money for your home, you both agreed that your home was adequate collateral (in some but not all cases, but for the sake of simplicity, let's assume you are in a jurisdiction where the bank can only take your house away and can't sue you for more). The bank was essentially taking a risk that if you defaulted, it could foreclose on you and its loan would be paid in full via the sales proceeds. 

But isn't it unfair to the bank if you default and your house isn't worth as much as the outstanding balance of your loan? No.

You and the bank both took a calculated financial risk your home might drop in value, so if you defaulted, the bank might lose money. The bank even charged you for this risk. Remember, your mortgage payment includes interest. The interest you pay the bank pays for your legal and ethical right to default on your mortgage. When you bought your house, you and the bank agreed that in return for your giving the bank your home as collateral, and paying interest, you had the contractual right to default. You paid for this right! The interest you paid gave you this right! Default and foreclosure is all part of a fair and ethical agreement you had with your bank all along.

Think of it this way. Assume you buy a house for $120,000 and take out a loan for $100,000. Your monthly payments are $1000. You pay $1000 per month for 10 years on a 30 year loan, and then you default. The bank forecloses on you, sells your house for only $50,000, and keeps all the money. Then the bank sends you a letter saying the bank lost $30,000. Hold on a minute! Don't shed any tears for the bank. You already paid the bank $120,000 over the last 10 years. Then the bank sold your house for $50,000 and even kept that money! Enough is enough.

Let's do the math: you already paid the bank $120,000. Then, according to your mutual agreement, the bank forecloses on you and gets another $50,000. That's a total of $170,000 that's gone into the bank's pocket over 10 years for a $100,000 loan. The bank made $70,000. It didn't lose $30,000. The bank simply didn't make as much as it could have made had default not occurred. And, you have nothing to show for the the $120,000 you paid over the last 10 years. You don't have a house any more. But, your original agreement with the bank covered this situation.

You aren't a bad person for defaulting. You did nothing wrong. You were in the right! By paying the bank interest for 10 years, you paid for the legal and moral right to default. 

So, that's my argument mortgage default is not wrong. It is a moral and ethical right you fairly negotiated with your bank from the beginning. You agreed that in return for paying the bank interest, should you ever default, the bank could take your house from you. It could foreclose and keep as much money as needed to cover the remaining balance on your loan. If the bank ended up short, too bad. That was all part of the bank's originally and fairly negotiated agreement with you. You paid the bank for the calculated risk it took. That's what the interest you were paying was all about.

With all this said, I'm not advocating foreclosure.

I'm just saying mortgage default it is your legal, fair, originally calculated, and mutually agreed contractual right.

Do not forget! There are many consequences to foreclosure and default that must be considered. Your credit history can be trashed, you will lose your house, and there are often many other financial and social consequences. So, always talk to a lawyer before you decide on default and foreclosure. There are many other options like short sales, renegotiating your loan terms with your bank, and seeking government assistance. You may even consider homestead and bankruptcy options.

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