Many homeowners are experiencing the worst of this economy. They are experiencing both a hardship that doesn’t allow them to afford their current mortgage payment and their home is worth less than the total of the mortgages on their home.

What to do what to do… Homeowners are undecided as to whether or not they should fight to keep their home or elect to short sale their home. There are pros and cons to both scenarios and we will highlight the areas you need to consider before you make your decision.

First, for those of you who are confused about short sales, we will briefly explain what it means when you sell your home in a “short sale.” A short sale is when the value of your home is less than the total amount of loans on your home. Homeowners put their home on the market and it is priced at the current appraised value which would encourage offers from buyers.

One of the biggest misconceptions of short sales is that sellers have to pay their bank the difference in price. This is not the case at all. If your bank/mortgage lender agrees to accept less than the loans on your home, then the bank is accepting the loss. Typically the reason homeowners decide to do a short sale is because they can no longer afford the home or they have to move out of the area. Banks understand this so they agree to allow you to sell your home for less than the mortgage loan and the bank absorbs the loss. The bank will not only cover the difference between what your home is worth now and the mortgage loan on the home, they will also pay the realtor fees, unpaid taxes, and any additional closing costs so the sale will go through.

Most homeowners cannot understand why their bank would agree to a short sale and the answer is very simple. Your bank knows you are struggling and it is better for them to agree to a short sale now than wait for you to continue to miss mortgage payments or lose your home to foreclosure. From the bank’s perspective, when they agree to a short sale, they are making the decision to cut their losses. They would prefer to lose as little as possible and if the homeowner continues to miss payments and the home is eventually lost to foreclosure, the bank would only lose more money.

Whether or not you should modify your loan or elect to short sale your home are extremely personal decisions. First, you have to ask yourself why you want to keep your home so badly. Some people attach fond memories to their home and while the home might be the location these memories took place, it is usually the people in the home that make the memories. In other words, homes don’t laugh and cry and they don’t enjoy exciting sporting events or school plays and the pets will be happy as long as they still have you. That’s not to say you should not try to keep your home. You just need to consider whether or not you should fight to keep your home using a more business mindset and what actually makes sense for you.

If your equity is down hundreds of thousands of dollars and you can barely pay your mortgage or your other bills then you should figure out a payment you can afford. Ideally, that payment should be close to what it would cost to rent a similar home in the area since you will essentially be paying rent on your home until you can recover your lost equity. If the payment is realistic, then you should try to modify your loan with your bank. For example, if you are paying $2200 and your interest rate is 8% and if your payment was closer to $1600 you would be fine, then you might make a strong modification candidate. However, if your interest rate is 5-6%, it would be harder for your bank to get your payment drastically lower since the lowest interest they can go is 2%.

If you are only paying interest on your loan now, you should know that all modifications being approved modify the payment to include principal, interest, taxes, and insurance. For people just paying interest, their payment will not give them as much relief since including the principal in the payment will offset some of the benefits of a lower interest rate.

Overall, there is a lot to consider when deciding between a short sale and a loan modification. Just remember short sales do not require you to come up with any money out of pocket at closing. If you decide to go the short sale route, just make sure your real estate agent actually has experience with short sales. Some agents say they know how to handle short sales but the best way to be sure is to ask them for some references from previous clients.

If you are undecided on what to do, you can always try to first modify your loan. Even if you are in foreclosure, you can still attempt to modify your loan and if it doesn’t go through, you can then try to short sale your home. Most banks or lenders will work with you to postpone a foreclosure sale if you are waiting on an answer to a modification or a short sale. The key is to always be in communication with your bank/mortgage lender. That way, you will stay on the same page and you don’t get any surprises. Ideally, you want to call them at least every two weeks to get status on your modification or short sale package.

In closing, there is no right or wrong answer on what you should do. Ultimately, you have to do what is best for you and your family. Most people feel better if they try to modify their loan before pursuing a short sale so they at least feel they explored all of their options. Some homeowners want to save their home at all costs while others are ready to let go. You just have to determine what is right for you and when you decide what to do, don’t look back. The old sayings ‘everything happens for a reason’ and ‘everything has a funny way of working out,’ apply when it comes to this as well. No matter what happens, the sky will not fall on you and your family will still be by your side. Health and happiness will always be most important because if you have that, everything else becomes a lot more manageable.