Mortgage Advice :)

[f0rgiv3n]

The other thread about "ridiculous" reasons to not pay down your mortgage inspired me to post this to get some feedback.

History:
Bought townhouse 2007, for 139k right before market crashed. We were young, didn't know too much on the mortgage stuff and ended up in a 5 year ARM 80/20.

So now, the house is worth (on a good day) 100k, and I owe 131k. First loan 104k (Currently adjustable, at 2.8% going through refi now to make it fixed at 3.5-75%), second loan 27k (high interest, like 8% YUCK).

Here's the deal, we're looking to move in the next year or so and my plan is to rent it out since we're so far under water and no other options.

We met with an adviser and he told us to pay off the second mortgage to reduce our risk. What are your thoughts on that? Assuming I will be renting this place out at or a bit over break even for me... Should I throw 27k at this thing? It's a lot of $$, not something I'm taking lightly. My current plan is to do it, but I'm curious what others think? Be easy on me... :P

[MonkeyMama]

Do you have the $27k? I suppose it depends on the big picture (age, other assets, etc.).

Personally I would consider it an "emergency" to pay off the second loan and get out from under water. It's what I would do. Plus, if you pay it down you are no longer "out of options." Maybe you could sell it then?

Other factors about your big picture might sway my decision a bit, but I don't see why you wouldn't pay it down if you could.

[MonkeyMama]

Okay, I looked up some past posts and saw the one where everyone told you to pay your second mortgage off first (because it is the highest interest debt). & looks like that is what you have been doing? So definitely stay the course. Your financial advisor and the SA-ers are in agreement on this one. (You don't have the cash, but have a lot monthly to throw at it - per other posts)?

[f0rgiv3n]

Yeah, that's exactly it. Thanks for the reinforcing encouragement. I've been doing so just to get rid of this ugly 8% second mortgage. I was also thinking the same thing about paying it off: once it's paid off the value might equal my mortgage which at that point I could cut my losses and just head out.

Just a little depressing that the housing market cost me $27k (a year's worth of saving)... BUT, what can ya do? lol

[fathappycows]

Just wanted to add my two cents. You haven't made a loss until you actually sell. If you can pay down your debt so that the rent covers your expenses, isn't it worth hanging on to as an investment property? If you can keep it rented, the market should recover eventually and the price of your property will increase again, don't you think?

[kv968]

So now, the house is worth (on a good day) 100k, and I owe 131k. First loan 104k (Currently adjustable, at 2.8% going through refi now to make it fixed at 3.5-75%), second loan 27k (high interest, like 8% YUCK).

I'm just curious, how are you getting a 3.5% fixed mortgage when the house is underwater?

What I've been hearing is that although there are low rate loans out there, not many are getting them unless they have supreme credit and 20% down.

[f0rgiv3n]

fathappycows, very good point and a great way to look at it. Thanks for your two cents on that. I think that is a good idea, i was thinking of it as more of an either or for some reason. By combining the two (paying it down, AND keeping it as a rental) it makes most sense.

kv968, HARP is what allows us underwater folks to refinance

[$ hoarder]

I am in a similar situation but was able to pay off my second mortgage and only had a 4% interest rate. I'm not sure what you could get for rent but if you are able to profit every month there is something to be said about someone else paying down your mortgage. Why not use the 27k on a down payment for your new house instead of pouring money into something you don't want?

[thesimplemoneyblog]

I'm not completely sure that the 'risk' is that the advisor is referring to that would cause you to need to pay the second loan now. You would likely be better off keeping the cash as an emergency fund since the rent you will be receiving will get you to a little over break even, and cash in your pocket now will afford you more freedom and flexibility than immediately tying it up in the house where you cannot access it with a home equity loan since you are in a negative equity situation.

The other observation is that if you have any desire to sell in the near term (couple years) it doesn't make a lot of sense to refinance given the costs of the underwriting. If you do in fact plan to hold it longer term though and rent like you mentioned, then I definitely think that refinancing in your scenario make sense. I would just pay additional money each month toward the second loan (smaller one at a higher rate) to get it paid off sooner to allow you more flexibility, but I think you would lose some flexibility in paying it in full now unless you just happened to have $27,000 readily available that you didn't need for other goals, emergency fund, etc.