Just as the home mortgage industry is beginning to slow down on foreclosures of homes a new crisis is threatening to arise – people voluntarily letting their current home go into foreclosure so they can purchase a better home for less money down the street. Is this a smart way to get a better home for a smaller mortgage or just a way to scam the lenders out of money?
How Can They Get Away With This?
With so many homes being foreclosed on in certain areas of the United States it seems people have the pick of the crop to purchase an expensive home for less money than it was previously worth. For those still living in those neighborhoods it seems unfair that they have not only lost the value of their home but are still paying on the larger loan while others are profiting from the foreclosures. Many have decided it would be better to let their current home go and purchase a different home in the area with a new, smaller mortgage. But how do they get away with such a deal? What mortgage lender or bank would give a new home mortgage loan to someone who has already defaulted?
The trick is that they go out and get a mortgage loan for the property they want while they still have good credit and then they default on the mortgage loan on the home they want to get rid of. This way they already own the new home before losing the old one.
Why Doing this is a Bad Idea
While it may sound like a good deal to get rid of the pricey mortgage loan and purchase an even better home for a smaller price it will cost you more than you think. First, when you default on the first mortgage you will lose any equity you have built up in your home. Even if you only owned your home for a year or two, the down payment and principal you have invested will be gone. Second, you will ruin your credit score for up to seven years. Even if you are current on all your other bills, letting your home go into foreclosure will lower your credit score considerably and stay on your credit report for up to seven years. You will not be considered a good risk the next time you try to purchase a high-end product like a car. And third, because you have lowered your credit score you will no longer be eligible for low-interest loans or low-interest credit cards. For years to come you will be paying much higher interest on purchases and spending much more money than if you hadn’t let your house go into foreclosure.
What Would Be a Smarter Move?
Instead of trying to buy a foreclosure home you should look into refinancing your current home. More than likely interest rates are much lower now than when you originally purchased your home, so you should be able to actually save money by refinancing your current mortgage loan for a better rate. Try to lock into a fixed mortgage rate instead of an adjustable mortgage rate (ARM). It was the ARM’s that got many people into trouble with their mortgages and led to the foreclosure problem, so stay away from those. Make sure to shop around to find the mortgage that is right for you.
While many people may think going into foreclosure on their current home in order to take advantage of all the homes for sale is a good idea but it isn’t. Hold out and it won’t be too long before your home is worth what it was before the mortgage crisis started.
