If foreclosure looms because you've missed some payments or you think you will soon, it's time to face what's probably the toughest question of the whole process: Does it make economic sense to keep throwing money into your house?
If your mortgage debt is significantly more than the value of your home -- which is becoming the norm rather than the exception -- the main question is whether the property's value will bounce back enough to give you at least a little equity in your house in the not too-distant future.
If you owe at least 25% more than the value of your house -- whatever you determine it to be -- the wise economic decision, under the present circumstances, would be to extract as much money as you can from the house now by stopping your mortgage payments and staying in the house payment-free for as long as possible, which can be as long as a year in many states.
How do I know what the market will do in the future? I don't. And I always keep in mind the advice that Mark Twain is reputed to have given a young man: "Buy land, they're not making it anymore." Also, no formula exists that can predict how soon a particular real estate bust will be over. But, while the general history of real estate booms and busts might indicate a fairly speedy recovery, history has never seen a combination of such factors as:
- the federal government takeover of the two major government housing loan entities
- the implosion of the finance industry
- a complete collapse of the residential loan market
- continued high numbers of foreclosures
- the inability to accurately determine residential real estate values
- super-tight credit markets
- the likelihood of a deep recession, and
- tapped-out consumers who can't make good on any of their debts, mortgages included.
The fact is, there is no guarantee your house will ever recover its original value. As the old saw goes, you don't want to throw good money after bad. If the housing market fails to rebound because of these factors (and others sure to come), every economic sacrifice you make now to keep your house could be for naught if you ultimately lose it.