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Mortgages - Refinance
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The costs of walking away from an upside-down mortgage
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(ARA) - Owing more on your mortgage than your house is worth may seem
like a bad investment. But the alternative - choosing to default on
your mortgage even if you can afford the monthly payments - will take a
significant toll on your credit rating.
"Strategically defaulting - deciding to stop paying your mortgage
regardless of your ability to actually carry the debt - will have a
far-reaching, long-lasting impact on your ability to secure future
credit," says Maxine Sweet, vice president of public education for
global information services company Experian, one of the three large
credit reporting companies that receive and update consumer credit
histories which are scored to help predict risk. "It's by no
means a move to be undertaken lightly."
About 355,000 borrowers strategically defaulted in the first half of
2009, according to research conducted as part of the Experian-Oliver
Wyman Market Intelligence Reports. Interestingly, Experian and Oliver
Wyman found that the homeowners most likely to strategically default
were also those with the highest credit scores.
While it may seem like a good move to simply stop paying and walk away
from a bad investment, keep several factors in mind when you consider
strategic default:
* It's very final. Strategic default will lead to foreclosure by the
lender. Foreclosure will negatively impact your credit report and
scores. In fact, only bankruptcy will affect your scores more adversely
than foreclosure.
For more information on just how severe the impact can be, VantageScore
LLC recently completed a study that evaluates the effect that
foreclosures, bankruptcies, short sales, and various mortgage programs
have on consumers' VantageScore
credit scores.
* The default will remain on your credit report for seven years. Since
credit scores are based on information in your credit report, the
foreclosure will greatly impact your credit scores during those seven
years. Securing other credit at reasonable terms and rates will be very
difficult, if not impossible, during that time.
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* Potential lenders aren't the only ones looking at credit reports
these days. Insurers, employers and even cell phone companies are
considering the creditworthiness of those who want to do business with
them. By impacting your credit report, a strategic default may affect
your ability to get a job, secure insurance and enter into important
service contracts.
* Fannie Mae, the government-controlled mortgage giant, announced on
June 23 policy changes that will make you ineligible for a new
Fannie-Mae-backed mortgage if you walk away from a current mortgage
that you actually could afford to pay. The ineligibility will
last for seven years from the date of foreclosure.
* Finally, in some cases, the debt that foreclosure "erases" may be
recorded as income, which means you will have to pay taxes on it.
"Strategic default may seem like 'walking away' from a bad debt, but
it's really anything but," Sweet says. "While you will no longer have
to pay the actual debt, you'll almost certainly 'pay' in other ways, in
the form of lowered credit scores and a drastically curtailed ability
to secure future credit for the next seven years. Higher interest rates
and unfavorable terms could end up costing you more in the long run
than continuing to pay on an upside-down mortgage."
To learn more about credit management, credit reports, credit scores
and the factors that affect them, visit www.Experian.com.
Courtesy of ARAcontent
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