DJ –
If you walk away, you’ll save money, but you’ll still be liable for the bank’s loss unless you settle it formally through a short sale or bankruptcy. If your 2nd is a credit card type of HELOC rather than a closed 2nd mortgage, they can pursue you for that debt for 20 years! If you are really lucky, the banks will discharge your obligations in the foreclosure and not go after you, but if they report their losses to the IRS for deductions, you’ll get a 1099 and your “forgiven” amount will be considered income that you will pay taxes on. Now, try and walk away from an income tax liability!
ALTERNATIVE TO CONSIDER:
You can still do a short sale even if you are current and on time on your payments. You will need a REALLY REALLY good and EXPERIENCED short sale realtor. The first thing to do is write a letter to the lender explaining that you have a financial hardship and will not be able to continue paying. (Just don’t stop paying while you wait for the answer, because your credit will suffer.)
If you get a short sale approval, you are off the hook for the upside down loan and as long as you never miss a payment, your credit is intact. Now go out and buy yourself a short sale! You’ll probably find a great house for a lot less right in your area. You’ll still have the advantage of ownership, rather than having to rent.
