What should you do if your mortgage amount is higher than the current market worth of your home? What if you owned the largest residential building in Manhattan? You could walk away and let your creditors clean up the damage.

This happened in 2010 when the American real estate investment firm Tishman Speyer gave up on New York City's Stuyvesant Town and Peter Cooper Village, two developments with a combined 11,000 apartments. One of the most extensive defaults in history, and the company is still operating successfully. Tishman Speyer only continued a long tradition by entering the commercial real estate market.

For homeowners with mortgages, however, the process of defaulting on payments will look somewhat different (it is unlikely to be as clean and easy). Nonetheless, this guidance may surprise you: According to the numbers, giving up is sometimes the wisest option.

When It's Best to Just Leave

Once upon a time, before the nationwide housing bubble of the late aughts, real estate prices could be expected to rise steadily. Although there were localised decreases in property value, national appreciation was widespread. That was the general pattern in the United States over the preceding decades.

But in 2008 and 2009, home values fell drastically (at times, posting double-digit declines in value). At midnight on December 31, 2009, 23.1% of all mortgages in the United States were underwater, meaning that the loan balance was more than the current value of the underlying property.

The unthinkable has happened: some borrowers who could keep up with their mortgage payments have chosen not to.

Some financial advisors recommend foreclosing on a home if the monthly rent for a comparable house would be cheaper than the mortgage payment. The temptation to foreclose increases when you are already underwater on your mortgage and anticipate that your costs will increase in the future (because of an adjustable-rate mortgage). (Renters often fare well in times of severe housing shortages.)

Strategies for Getting Rid of Your Mortgage

A short sale, voluntary foreclosure, or involuntary foreclosure are the three most popular ways to stop paying a mortgage. A "short sale" is when a borrower sells a property for less than what is still owed on the mortgage. The lender receives the total sale price because an outside party (not the bank) purchased the property. The lender can choose to waive the difference or pursue legal action. The borrower must then make good on the remaining balance of the mortgage, which may be all or a portion of the sale price.

By contrast, in a voluntary foreclosure, the borrower returns the property to the lender. Contact your bank and plan to drop over the keys to initiate a voluntary foreclosure. A homeowner's credit score will take a hit, but they won't have to make mortgage payments after this.

A lender can start an involuntary foreclosure process if they are not paid. The lender will use the legal system to foreclose on the property. Even though the homeowner may be permitted to stay in the house for some time (at no cost) throughout the foreclosure process, the lender will be actively trying to collect on the debt, and the homeowner will eventually be evicted.

What Are Some of The Drawbacks Of Walking Away From A Mortgage?

Giving up on an underwater mortgage has the same long-term effects on your finances and credit as a standard foreclosure. If you're considering abandoning a house that's upside down, you should know about some of the probable repercussions:

1. Debt After Foreclosure

After a foreclosure sale, you may still have debts to your lender. Your state's rules will determine whether or not a lender can seek a deficiency judgement against you to collect on a loan that you have not paid, but they may also hire a collection agency to do so.

The bank may try to recover the remaining $20,000 on a $100,000 mortgage if the foreclosure sale only nets $80,000. Creditors in certain states may use wage garnishment to get their money back.

However, non-recourse laws protect homeowners in certain jurisdictions. In default in one of these states, the lender's only recourse is to foreclose on the borrower's home; they have no claim on any other assets. (Unless it was used to acquire the property, this insurance does not cover home equity loans.)

Talk to a real estate lawyer about the foreclosure process in your state before you default on your mortgage.

2. Damage to Your Credit Score

Foreclosure negatively affects credit scores for all involved parties, regardless of whether the foreclosure resulted from strategic default. The credit score will be negatively affected for seven years after a foreclosure. Because of the damage to your credit, obtaining credit cards or auto loans will be more complex, and you will have to pay more interest and extra fees. Rebuilding credit with prompt bill payment takes time, but it is possible.