When should someone foreclose?

Question

Suppose you have a mortgage that is set up so that if the property value declines your payment increases. Suppose that at the time of purchase the home was worth $500K.

Your choices are:

1) continue making the payments and sell the property for $400K in 5 years. Total cost is your increased payments the $100K loss.

2) foreclose now when the house is worth $380K.

3) wait to see what the market does, see that it worsens in a year, and foreclose when the home is valued at $250K

Is there a best strategy here (credit rating impact excluded)? Does it matter what the current value of the property is when you foreclose? If you're going to foreclose should you do it sooner rather than later?

Answer 1

There is no best answer to your question.  Bear in mind that, if you have other sizeable monetary assets, the lender can and will pursue you in court to extract the deficiency amount. (Save for California).

And, if you took a mortgage in which the payments increase based upon a regular appraisal of property values, you seriously need your head examined.

Answer 2

What type of mortgage is this?  I've been in real estate for 7 + years, including being a senior mortgage underwriter, and I've never heard of a mortgage that is tied to the value of a home.  I'm not saying this doesn't exist - just I've never heard of it and neither has anyone from my company and some of these people have been in the mortgage field for 20+ years.

Answer 3

Gee, this sounds like homework.

My answer: I wouldn’t give a d**n because such a mortgage doesn’t exist. Your payments are never related to *value* of your home; they’re related to the amount of your mortgage.

The least your teacher/professor could have done would have been to come up with a plausible scenario.  

Answer 4

Yes Peter, you should do something before you foreclose. When you know that you are about to have a problem with your mortgage then put it on the market with the amount the house is worth. Now if the property value is less then what you have expected, lower it a little and take the best offer, because right now no one is getting what their home is worth.