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As people who read this blog may know, I am a contributor to the Yahoo! Answers message boards.  I have seen many questions come up on should I let my home go into foreclosure or not lately.  I'm posting one question here along with my answer to that question.

Question:  I have had a fixed rate mortgage for the past 5 years and it is set to start adjusting soon.  I spoke with my mortgage broker and he said that my payment will go up by about 40% at that time which I can't afford.  He ran some comps and told me that I owe about $100,000 more for my house than it is currently worth.  His advice was for me to buy a new, cheaper home now then stop paying on my current mortgage and let the home go into foreclosure.  Should I walk away from my home since I can't afford it and I am upside-down on my mortgage?

Answer: Absolutely Not! The only thing you should walk away from right now is your mortgage broker.  The advice you are getting from him is clearly not the best around.  I see a possibility for you to benefit on this (by getting out of the mortgage) and I see him definitely benefiting on this (since he will get to sell you a new mortgage).  My first thing to look at here would be how did you end up in this situation?  Was it the mortgage broker who steered you toward this type of loan?  If so, ask him why he did it.  If not and it was you who were going for more home than you could afford then you need to take responsibility and fix the problem.  Walking away from it is not fixing it.

    First, let me say that it is great that you are conscious of your mortgage and trying to resolve any problems before they hit you in the face.  I’ve seen far too many people just sit back and not take action until it is too late.  Those people who wait until the adjustment has already happened end up in desperation and panic.

    Owning a home brings with it a great deal of responsibility, and if you are sufficiently mature to own a home then you are certainly mature enough to deal with the consequences of some questionable mortgage decision-making. There are many options you have for proactively dealing with your coming mortgage adjustment short of abandoning your home to foreclosure.  It would be a major step in the right direction for your relationship with money and your personal financial and emotional maturity for you to take responsibility for the consequences of your past decisions and pursue those options before throwing in the towel.

    Your mortgage broker's advice is intended to position you against the worst-case scenario.  I would suggest you try to project the best-case scenario and do everything in your power to manifest that outcome.  That requires a big mindset shift, but I've seen homeowners do it, and end up keeping their homes or selling them — both of which are preferable options to walking away.
Foreclosure is your worst-case scenario.  The cost of a foreclosure is greater than just losing your current home.  Foreclosure has tentacles that reach into many other places in your life.  Whether you walk away from your house or try to resolve things with your lender, foreclosure will result in a major decrease in your FICO score.  This drop in your FICO score will be large enough to prevent you from buying another home for several years and to cause your credit card companies to start closing your accounts.  Additionally, many landlords now look at credit reports when gauging the acceptability of prospective tenants.  If you allow your home to go into foreclosure expect to have your current credit reduced and be denied future credit for many years to come.

    The answer to this is not to simply buy a new home ahead of time; frankly, if you are that overextended, I'm not sure how feasible it is for you to obtain financing on a home right now, and it is a morally reprehensible to plan so strategically to abandon your obligations under one mortgage and attempt to avoid the consequences of doing so in one fell swoop.  When you accepted the mortgage, you accepted the responsibility for paying back a loan.  The home was just used as collateral.

    The ethically, morally and responsible move is to put into play a foreclosure avoidance plan, and then work that plan. There are homeowners out that are having success avoiding foreclosure.  You should join their ranks and follow your plan to avoid foreclosure before just throwing up your hands in defeat.Homes are not disposable. The fact that you currently owe more on your home than it is worth is not sufficient justification for abandoning your home. I know many homeowners who once were upside down, but stayed in their home for another 10 or 20 years, and now that same home is worth three or four times what they paid for it. Homes are items that appreciate over a long term.  This is one reason that mortgages are tied to security terms and not the short-term rates that the fed adjusts.  Take a long-term view on the value of your home, and don't toss it away like you would a bad stock; unlike those shares, your home's value will usually come back over time.

Here are some things to do to get things rolling and keep yourself from having a foreclosure.

1. Try to refinance. If you are worried about being upside down on your home you might need to assess how sustainable this home is for you. If you simply bought way more home than you can ever realistically afford with a reasonable mortgage, you should jump straight to #3 and try to sell your home. If other events, like a temporary loss of income, are making it difficult for you to afford your home now but you think you can afford it over the long haul, work with an ethical mortgage broker (obviosuly not your current broker) to see if it makes sense for you to refinance your mortgage, and whether any affordable mortgage options that are sustainable over the long term are available to you.   
2. Loan modification. Call your lender!! Ask for the loss mitigation department; put together the hardship package they request (usually a bunch of your financial paperwork to show that you really can't afford the upcoming adjustment); and then try to negotiate a few months with no payment, a reduction in the balance of your loan based on fair market value, an extension of the low-payment period for several more years, a reduction in interest rate, etc. Lenders vary widely in their amenability to making these sorts of arrangements.
3. Get extreme about increasing your income. If you truly want to keep your home, consider going to extremes. I've seen people avoid foreclosure by renting out rooms, taking second jobs or taking in freelance work on the side.  
4. Short sale. If you just bought way more home than you can ever realistically afford, trying to liquidate your home through a short sale is a great option. Work with a Realtor who has experience successfully representing sellers in short sales. I've even seen homeowners have real estate investor friends purchase their home through a short sale, which may give the seller the opportunity to lease and later buy the home back.    

    Responsibility is the ability to respond, not the ability to run from your problems. The savvy way to respond to your situation is to exhaust the above ethically and financially responsible options before your mortgage adjusts