Foreclosure: The Pros and Cons

Ed McMahon appeared on Larry King Live yesterday and talked about how he is on the verge of having his Beverly Hills home foreclosed because he is $644,000 behind on payments on his $4.8million mortgage.

While poor planning does play a big role (personally, if I had been in McMahon's shoes, and given that he says he had much less money than what people thought he made, there are better things I can think of to use my hard-earned money on- things that would have ensured that my money kept making even more money- than a swanky mansion in the 90210 zip code, but that's just me) foreclosure can happen to anyone, and often, it's due to a combination of factors, a lot of which cannot be helped, such as the economy, health problems, job loss, or divorce.

In a perfect world, if you can't make your mortgage payments anymore, you'd call you bank, ask them to do a loan modification. They'll acquiesce and come up with a way to make your payments affordable and you'd live happily ever after. That's not always the case.

If you're currently thinking of walking away from your home, here are some pros and cons that I hope will help you make the right decision.

THE PROS:

• If you choose to walk, you may be able to stay in your home payment free for up to 18 months.
• During that period of time, you will be able to save the payments you would have made to your lender and pay off your consumer debt or save for life after foreclosure.
• After you've been foreclosed on, you may have to put several month's rent down to secure a rental property.
• At this point, you may have nothing to lose. If you owe more than the house is worth, your home is no longer an investment. And if the property is not your primary residence, the "investment" may be costing you an awful lot of money.
• It may be significantly cheaper to rent than to continue paying the mortgage on your property.
• As home prices continue to plummet, making payments on a home bought at the peak of the market may just be throwing good money after bad.

THE CONS

• The principle area of concern is that there will be a foreclosure on your records. Foreclosures stay on your credit report for seven years. It is usually at least four years before you can get back into a house.
• When you go into foreclosure, the bank is often able to get a deficiency judgment. This means you will owe the bank the difference between what the house was sold for and the balance on the mortgage. Many people have a deficiency judgment against them, find themselves in a position where they have to file bankruptcy on top of the foreclosure.
• You should consider where you will live after the foreclosure. Many large property companies won't consider renting to people with foreclosures on their records. Individual investors may consider you only with a deposit of several month's rent.

Given that foreclosure should always be the final option, I do hope that you call your trusted mortgage advisor, as well as your CPA, to discuss the ramifications of your individual situation before you make your final decision.