Personal loans, home loans, and credit card debt, which one should you default on to protect yourself? Twenty years ago, home loans would have not even been in the picture. If anything, people chose to default on credit cards, keeping personal and home loans intact. These loans had more of a stigma to them and you just didn’t default on your mortgage or your personal loan. However, this is changing rapidly.
Strategic Default on Home Loans
You read that right. More and more people are choosing to default on their mortgage while still paying other forms of debt. They keep paying all the other bills except for their mortgage. It has become so popular that banks are calling this a strategic default. Experian (credit score) and Oliver Wyman (International consulting firm) looked into the issue and estimated 18% of defaults above 60 days were strategic. This is up a whopping 128% from 2007. They are not the only ones finding this new trend. According to research done from Chicago Booth/Kellogg Scholl Financial Trust Index, strategic defaults increased from 22% in March 2008 to 31% in March 2009.
Why Default on Your Mortgage?
Why would anyone default on their mortgage instead on their personal loans or credit cards? It is pretty ingenious if not a bit unethical. Due to the previous huge over-inflation of home prices, more and more home owners are finding they are upside down with their mortgage. Since they owe more on the house than it is worth, they feel it makes more sense to default on that loan to get out of paying high interest rates on a loan that costs more than the value of the house. While others are taking years to get out from under the upside down mortgage, they strategically decide to default on this loan.
Strategic Defaults Effect Future Loans
We all know defaulting on your mortgage effects your credit score, making getting personal loans, credit cards and even secured loans more difficult. What people are not considering is how it will affect future mortgages. If the trend continues, then banks and brokers will have no choice but to take this possibility into consideration when issuing home loans. This will affect all of us whether we have defaulted or not. Banks will have to consider the possibility and will have to charge more. It could mean a higher down payment or higher interest rates. The only good part is that banks will have to consider the probability of a home loan going upside down. When they stop making loans that go upside down, no one will have to strategically default on their mortgage.