When to walk away from a mortgage

But again, there's no evidence these borrowers are merrily skipping away from their biggest debts. What's far more likely is that they're facing payments they simply can't manage. Rather than continue to throw good money after bad, they're giving up.

And that's not necessarily immoral. It may just be realistic.

When to walk away

Understand that most borrowers didn't commit fraud to get their loans. They didn't have to. Lenders were falling over themselves to make mortgages that made no sense, mortgages that would become unaffordable with the first or second payment adjustment.

The lenders assumed, as did many borrowers, that these loans would be refinanced or the homes sold before the mortgages became unaffordable. Lenders and borrowers alike discounted the possibility that home prices could fall, wiping out homeowners' equity and making refinancing or a break-even sale impossible. Now we're reaping the fallout.

But all the finger-wagging in the world won't change the fact that many people can no longer manage their mortgages. Help, if it comes, won't be quick enough or substantial enough to save millions from losing their homes.

If you're wondering whether to walk away from your mortgage, these are the questions you need to ask yourself:

Can you make your mortgage payments while meeting your other obligations? Those obligations include feeding your family, paying your other bills and saving for retirement. If you can trim your expenses and reduce your bills to make your mortgage more manageable, clearly you should.

But if your payment already gobbles up half or more of your gross income and more increases are on the horizon, your situation may be untenable.

Can you keep your home without raiding your retirement funds? It's almost never a good idea to dip into your 401k or individual retirement account to pay continuing bills. Withdrawals trigger serious tax penalties and deprive you of future tax-deferred returns -- figure that every $1,000 withdrawal costs you $10,000 in future retirement income.

That sacrifice might be worth it if you'll actually keep your house, but many who are tempted to raid their retirements will only delay, rather than prevent, the loss of their homes. Then they're left with no home and no retirement. Federal law protects retirement funds from creditors' claims, so you would be able to keep your money if you wound up in bankruptcy court.

Is a rescue in sight? Any homeowner with an unaffordable mortgage should call his or her lender and a housing counselor to discuss possible solutions and to pursue any that might provide relief. You may have to be persistent; lenders say they're trying to work with borrowers, but many have been overwhelmed by the volume of distressed customers. (You can find a list of homeowner resources and counseling programs here.)

After exhausting your options, you may have to face the inevitable: that you can't afford to keep your home and that continuing to struggle is pointless. If that's the case, make one more call: to set up an appointment with a bankruptcy attorney experienced in dealing with the foreclosure process. What comes next isn't pretty, and you'll want a knowledgeable adviser to guide you through it.

Liz Pulliam Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "Your Credit Score: Your Money & What's at Stake." Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board and helps middle-class families cope at Building a Brighter Future.

Updated Nov. 18, 2009

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