In general, Tim Regan is right- that if you stop making payments on the
mortgage, the mortgage company gets to foreclose on you and keep your
house. There are several reasons they are still at risk.
1. Suppose you buy a house for $200,000, put down $20,000, and borrow
$180,000. Then mortgage interest rates skyrocket and housing prices beco=
depressed. Your financial fortunes turn bad an you can't make payments o=
your house, which is now worth $175,000. You may be tempted to skip town=
since your equity is gone. If the mortgage company forecloses and sells=
through a realtor, they net $164,500. They lose $15,500 AT LEAST.
2. In practice, foreclosure is a long, expensive, nasty process. It may=
take as much as a year before the owners move out and the property can be=
sold. Let's say your monthly P & I payment is $1400. A year's worth of
missed payments is then about $17,000- again, the mortgage company is ou=
by that much. They are probably also paying Homeowner's Insurance and
Property taxes as well to protect their interest.
3. Finally, when a borrower's financial situation is so poor that he or
she defaults on the mortgage, the house may have turned into a "handyman'=
special", which could depress the price the lender could get for it in a
Two things you can do to shorten the period you have to pay for this
coverage. One is that if real estate values do increase and you can get
some appraisals showing that your equity in the house is now 20%, you may=
be able to persuade the lender to drop the insurance. You can also pay o=
principal early when you have "spare change". Thanks to extra payments
I've made on mine, the current balance on my mortgage is what it would ha=
been at June, 2001 under the expected payout. Sometimes compound interes=
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