Dear Liz: My wife and I had two houses built for resale, then as you know, things went bad. The construction loans were continued at 7.75% and we finally rented the homes, but the mortgages are costing more than we’re getting in rent. We have attempted to refinance but will have to pay down each loan by $100,000 to do so, since the homes have fallen in value and lenders are more conservative about loan-to-value ratios. I am thinking of threatening to walk and maybe they will negotiate but am wondering about the downside. I know our credit will be impacted but since I am over 70 and do not plan to do a lot of borrowing, that does not seem to be an issue. I do make enough to keep this going but do not want to. Please advise.
Answer: Walking away from these mortgages will trash your credit, but you may face a much bigger problem: the lender could sue you for the balances you owe. Some states protect borrowers from such lawsuits, but the protection typically doesn’t extend to investors.
You may want to talk to an attorney familiar with debtor protection in your state (a bankruptcy attorney might be a good choice) to get an assessment of your risk. You also should discuss your overall financial situation with an experienced, fee-only financial planner. The planner can help you assess whether sinking another $200,000 into these properties might pay off in the long run, or if you’re risking throwing good money after bad.
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