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re: Re It's "immoral" to strategically default on one's mortgage
Posted on 12/14/11 at 10:46 am to LSURussian
Posted on 12/14/11 at 10:46 am to LSURussian
Let's change the hypo a little. Say you buy a long term CD with a bank when interest rates are very low. The CD has some fixed early withdrawal penalty, which is set out in the contract. A couple of years later, interest rates have shot up and your CD is now losing money in real terms. You do the math and realize you'd be better of paying the early withdrawal penalty, taking the money out, and buying a CD at a different bank that's offering much higher interest rates. Would that be inethical?
I think there are a lot of similarities between this and the home default. In both cases you're making a decision in your best interests, against the bank's best interests (they'd love to keep paying you the 1% CD), and you're 'breaking' a contract, albeit one with a clearly delineated penalty provision in favor of the bank. Yet they feel very different. I wouldn't blink twice at the idea of changing out CDs. I would be much more hesitant to walk away from a house, although I certainly would if circumstances demanded.
Some of this is because the consequences are worse for defaulting; you don't get your credit smashed if you break a CD. But I think it goes deeper than that.
I think there are a lot of similarities between this and the home default. In both cases you're making a decision in your best interests, against the bank's best interests (they'd love to keep paying you the 1% CD), and you're 'breaking' a contract, albeit one with a clearly delineated penalty provision in favor of the bank. Yet they feel very different. I wouldn't blink twice at the idea of changing out CDs. I would be much more hesitant to walk away from a house, although I certainly would if circumstances demanded.
Some of this is because the consequences are worse for defaulting; you don't get your credit smashed if you break a CD. But I think it goes deeper than that.
Posted on 12/14/11 at 11:01 am to Cold Cous Cous
quote:
I think there are a lot of similarities between this and the home default. In both cases you're making a decision in your best interests, against the bank's best interests (they'd love to keep paying you the 1% CD), and you're 'breaking' a contract, albeit one with a clearly delineated penalty provision in favor of the bank. Yet they feel very different. I wouldn't blink twice at the idea of changing out CDs. I would be much more hesitant to walk away from a house, although I certainly would if circumstances demanded.
You've hit the nail on the head. Mortgages come with several implied options "free" for the borrower. One of them is a prepayment option. Another is the option to default.
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