Should we walk away because the only loan mod on the table is NOT GOOD at our age!?

We bought five years ago in prime, BUT we (thought) we bought smart! In a nutshell, we were “nearly harassed” by our bank to refinance after only one year and had long discussions about our being “too conservative” and needing to “use the equity in the house to update it and double your money.” Of course we didn’t expect to double it, BUT people were doing just that all around us (even triple!). Now, at the end of our 3-year adjustable rate mortgage (originally had a fixed of only 5%!) and lost one job, the second one’s pay got cut, etc. etc. we were still okay! Cut back to a VERY LEAN lifestyle without cable TV, etc. etc. etc.
The ONLY thing the bank (the servicer because it’s now a Freddie Mac loan) is willing to do “to help us” is change our loan to FORTY years at 3.75% which seems like a great rate, BUT they’ve tacked on $ 20,000 in “fees!” And by charging us fees AND adding ten years, what exactly are they “offering us?”
This house is worth $ 323,500 but the certified appraisal from March 2007 was $ 548,500 (that the bank itself paid for). NO ONE is selling in our neighborhood. They sit on the market for a year, then foreclose…

My question to anyone out there who can offer a “numbers opinion” is this: The total debt now including the equity line is $ 500,000! In 12 short years we’ll be 60 years old and only be 1/4 of the way through the loan, probably not making the same income! If we do get better jobs and have to move, say in three years, we HAVE to foreclose to get out of the house… better to do it NOW and start repairing credit before we’re SIXTY?
Using average projections, etc… this house won’t even let us break even and move in five years… more like ten but the cost to stay… even more by then, the roof, etc. could bankrupt us anyway… We have to decide tonight whether to take the deal or just foreclose and start a new life, be it full of headaches and lawyers for a couple of years…
We just lost another $ 2,500 in the past 30 days…

Walking away IS an option because “most” lenders are not going through with the costs associated with judgments and civil suits since it’s obvious we’re broke if we lost our only property…
If they do sue us, so be it. We have nothing and can easily live a cash/simple life just to be out of this nightmare that’s been going on since January!

The big question is… On a house worth $ 320,000 TODAY and losing more every month, how can we justify a brand new 40-year loan for $ 496,000 AT AGE 48. The age is key… Thanks again.
Short sale does not do less harm to your credit report since nowadays, most of the lenders are requiring you to sign a form guaranteeing the shortage! This makes it so that they don’t even HAVE to sue you! You’re agreeing to it! The same goes for “Deed in Lieu!” Basically, if you can’t stay in the house, you should foreclose once you REALLY learn all the legal details! The lenders are pushing the HYPE around short sales and deed in lieu only because it helps THEM! With the hundreds of thousands of foreclosures in this country, it’s only a matter of a couple of years before there are all kinds of “new loans! foreclosures okay!”

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