It seems like you can’t go a day without hearing another news story about the historic housing crash. Over the years, people purchased homes they could not afford using adjustable rate mortgages they should not have used. And now, ARMs are resetting at record numbers. Monthly mortgage payments are going up by hundreds, if not thousands, of dollars a month for millions of families across America. But in the meantime, home values are plummeting.

The question is, should you keep paying an increasingly more expensive mortgage while the value of your house is falling?

Walking away from your mortgage may not seem ethical to many people, but if you read over your mortgage papers you will see that it is a contractual option. When you signed your mortgage, you agreed to pay your bank back a certain amount of money (with interest) over time. However, if you chose not to pay the bank back, the bank will exercise its right to take ownership of your house and sell it in order to pay off your loan. As you are probably well aware at this point, this process is known as foreclosure. And it’s happening everywhere.

What kind of families are affected by foreclosure? In most cases, foreclosure is the result of the following:

• An ARM has reset to a higher interest rate, resulting in greater monthly mortgage payments. The homeowner cannot afford the reset, and stops making payments. Over time, the bank evicts the homeowner and sells the house to recoup its losses.
• A homeowner, who can afford their monthly mortgage payment, has been watching the value of their home fall consistently over the past two years. At this point, the value of the mortgage is worth more than the value of the home. Which means that if the homeowner needs to move or otherwise sell their home, they will need to bring a substantial amount of their own money to the table so that they can move on. In situations like this, many homeowners are simply walking away from their home, allowing it to fall into foreclosure.

While on paper, walking away from your mortgage to avoid financial ruin sounds great, there is one major pitfall: your credit will be destroyed. On top of the late payments your mortgage company will report to the credit bureaus, they will also report the foreclosure. A foreclosure on your credit report is a financial kiss of death. Banks will refuse to loan you money, and your credit card rates will like go up since credit card companies frequently monitor your credit report. Keep in mind that you will also have a difficult time finding a rental home to live in, since landlords check your credit report as part of the application process. A foreclosure on your record does not look good when you are trying to prove you can make rent payments.

But should you walk away from your mortgage? In the end, it’s an ethical decision. While yes, financially it may make sense to leave your homeownership days behind you, realistically you may need to bite the bullet and see if you can work things out with your mortgage company.