With home prices down 50 percent in some North County areas, many residents face a difficult choice: Stop paying the mortgage and rent for less, or stick out history's toughest housing market and pay a mortgage that equals hundreds of thousands of dollars more than the value of the house.

Other than walking away from the home and letting it go into foreclosure, a third option for homeowners has been a short sale, where the bank agrees to sell the property for less than the mortgage amount.

Government officials have attempted to stem such activity with loan modification programs that reduce the principal of a mortgage, essentially lowering the amount owed. Those efforts have failed, so far, benefiting only a tiny number of borrowers.

A credit score analyst said giving up on a mortgage will essentially wreck for years a borrower's credit score, a calculation used by lenders to determine whether to lend money to a borrower.

However, other analysts and some real estate agents say avoiding damage to credit ratings is an insufficient incentive to keep a home as prices continue to plummet below their mortgage amounts.

Those analysts say borrowers with foreclosures can repair their credit scores within three to four years. And, they say, prices will not bounce back for at least three years.

Indeed, they say borrowers need to feel an emotional attachment to the house or a moral obligation to repay the loan contract to pay for a mortgage that is higher than the home's value.

And even with a loan modification, most borrowers will not keep a pristine credit score.

"If you look at it as a strictly business decision, a lot more people would walk away," said Jon Maddux, co-founder of You Walk Away, a Carlsbad firm that helps homeowners go through foreclosure for a fee. "If you flipped the coin around, and the bank was in the shoes of the homeowner, they would walk away in a heartbeat."

In certain cases, borrowers can save thousands through foreclosure on lower rent payments for a comparable home.

Working to avoid foreclosure

But for Martin Garcia of Spring Valley, and many others, it was not a business decision.

He loves his home and wants to keep it, so Garcia contacted a loan modification specialist who works for free and altered the terms of his mortgage.

Garcia said he has dodged foreclosure -- at least for now.

His mortgage payment had been about $900 a month on a negative-amortization loan, meaning he was paying less than the interest accrued. So with each payment, he owed more than the month before.

When the amount owed on such mortgages balloons to a certain amount, the mortgage adjusts so that the borrower has to pay off all the interest accrued each month as well as some principal.

For Garcia, that meant a jump in payment to $2,500 per month, too much for the auto mechanic who earns about $1,000 per week.

With the loan modification, Garcia now pays $1,500 per month. But the payment only covers interest. Therefore, the amount Garcia owes is not increasing, but it isn't decreasing either.

In two years, Garcia's loan will readjust so that he has to pay all the interest due that month and some principal, probably pushing the amount owed over $2,000 per month again.

When that happens, "I don't know, I just hope God comes and helps me out again," he said. "I'm not happy. I would be happy if it was fixed for the rest of the loan."

On the opposite end of the spectrum, real estate agent John Woodall might be one of the few salespeople in North County telling his clients it's not a good time to buy. Woodall said he sold his house in 2004 and has been renting a place in Vista, planning to wait until prices stabilize before buying again.

And Woodall advises his clients to do the same, trying to persuade homeowners with negative equity, or who owe more than the value of the house, to short-sell their properties rather than work toward a loan modification.

"Your good credit is going to come back before your equity does," Woodall said. "So you might be better off short-selling, waiting for your credit to come back, and buy the same home at a lower principal balance."

Credit scores take hits

But short sales offer little to no relief over foreclosures for a borrower's FICO credit score, one of the most commonly used scores, said Ethan Dornhelm, a principal scientist for Fair Isaac, a company that calculates FICO scores.

Banks report short sales to Fair Isaac as "settled for less than the full amount. In that case, it's considered derogatory, just like a foreclosure is classified, and will have a similar impact," Dornhelm said.

Woodall said short sales are still a better option than walking away and letting banks foreclose because lenders will delay foreclosure for a short sale, allowing homeowners to stay in their homes for free longer. Some of his clients haven't made a mortgage payment in almost two years, he said.

Even loan modifications usually damage the borrower's credit score.

Often lenders have been unwilling to reduce payments for borrowers who are not late on their mortgage payments, say loan modification experts.

And once a borrower is more than 30 days late on a mortgage payment, it will affect the FICO score and stay there. A loan modification does not wipe it clean, Dornhelm said.

The damage to the credit score is far less than a foreclosure, which can knock as much as 200 points off the credit score of a borrower with a near-perfect score of 800. For borrowers with lower scores that already carry delinquencies, the damage would be less, he said.

Dornhelm said it is too difficult to predict what delinquency payments before a loan modification would do to a credit score, because the calculation includes too many other factors.

But for homeowners not emotionally attached to the house, saving a credit score might not persuade them to keep the mortgage payments in the mail.

Optional foreclosures

As home values continue to tumble -- average prices were 36 percent below a 2005 peak as of October -- analysts worry more that people will go through foreclosure even if they can afford the payment.

"If I can rent down the street for $2,000 less, I'm going to end up leaving, and the lenders are going to have to start looking at this before this problem explodes," said Nadiyah Casey, housing counselor manager for Money Management International, an organization that offers free help to borrowers facing foreclosure.

Loan modification programs have proliferated with the foreclosure boom. But very few offer reduction of principal, meaning borrowers who can afford the payment but don't want to pay more than the house's value have little recourse.

A government agency, the Federal Housing Administration, hoped to address the problem with its Hope for Homeowners program, which offers a refinance loan at 90 percent of the house's value. Lenders have to agree to take the loss from the current amount owed.

The housing crisis has sent about 2 million homes into foreclosure across the nation. Since launching Oct. 1, Hope for Homeowners has received 412 applications. Of those, 17 refinances have closed, said Lemar Wooley, spokesman for the agency.

Even though principal reductions are not common, Casey said borrowers should try rather than automatically enter foreclosure.

"Before you walk away, give that scenario to the lender," she said. "You need to ask them, 'What is my incentive to stay in this home?' "

Contact staff writer Zach Fox at (760) 740-5412 or zfox@nctimes.com. Read his blog, "On the Realside," at bizblogs.nctimes.com.