Spend it all to get on top of things?

[ua_guy]

I've got a house that's under water (fiscally...not literally). Owe $435k and its worth $350k on a sunny day.

Primary mortgage 30y fixed is $393k of that
I have a 2nd mortgage which I used as a down payment to skip PMI which is $42k.

I've got enough cash in the bank without touching retirement accounts to nuke the 2nd mortgage. It seems like the one to hit, seeing how its at 6.5% on a 30 year fixed term. (It's seriously goofy...it's basically a HELoC, fixed rate, on. 30 year term).

I have a "spouse" who still has some cash in the bank in case of emergency. We collectively make more than $225k/year. I'm at a point where I am physically/mentally/emotionally done with the home I'm in...both of us are...but we see paying down our situation to be more savvy than defaulting or walking away. We make good money, have perfect credit, but we're in a home that sucks. Its been ridiculously problematic and on too of that it no longer fits our needs.

Would it be savvy to dump my available cash to get closer to getting out of it? -or at least eliminating that awful 2nd mortgage which is mostly interest?

I can't describe how 'done' I am with this home. I'm 30 and only have modest retirement monies saves up. I know draining those accounts now (all $50k of it...not much)...could be harmful in the long run. But at what point does one decide to go 'all in' to rectify a bad situation? Is restarting now worth it in the long run?

[bjl584]

Do you have any money besides the $50K that you want to use to knock out the 2nd mortgage?

What is the situation with your "spouse?" Are both your names on the deed?

I'd like more info on why you are done with the house and why it no longer fits your needs.

[ua_guy]

Do you have any money besides the $50K that you want to use to knock out the 2nd mortgage?

What is the situation with your "spouse?" Are both your names on the deed?

I'd like more info on why you are done with the house and why it no longer fits your needs.

Yes. I have about $45k saved in general savings which would be liquidated to pay off the 2nd mortgage.

My spouse and I are unmarried...so he's not really a spouse, but we have been together for 9 years and both our names are on the deed. And as a side note, WA state is now allowing same sex marriages, so we can finally get married. We're momentarily holding off until we decide what to do with the house. We want to be as strategic as possible and use every scenario to our advantage.

I want a newer/well built home with just a bit more space inside and more privacy. Our current home is 1440sqft. It was built in 1968; we bought in 2006 and have spent the last 6-7 years building our life there and also dealing with its problems. We've had to replace the roof twice, new windows, landscaping and drainage issues, bathrooms had to be torn out including the subfloor, paint and siding work, a leaking masonry chimney, pest damage and remediation....to be a 'nice' house it still needs new flooring, drywall, a new kitchen. A lot of this happened while both of us were making significantly less. In a lot of ways I feel like I gave everything...lost out on my 20's being stressed out, broke, and living in a constant project than I have grown to loathe.


Here's the deal:


I'd be paying it down to realize one of the following options:

1. So I can refi.... Option a...refi on 30 year fixed and keep it as a rental property essentially breaking even. Option B - refi on a 15yr fixed and aggressively paying down to what it would sell for while saving some cash over time.

2. Depending on what the market does this spring, if I just pay it down now and use all my cash and retirement to get it down ~$350k which is within reach of a sale.

[bjl584]

I would suggest getting married as soon as you are allowed to. Either that, or get his name off the deed. Not saying that it is going to happen, but if you two break up it will get really ugly when it comes to that house and the division of assets.

That aside,
It's generally not a good idea to completely wipe yourself out to pay off debts. If you have an emergency of some kind the only solution will be to take on more debt to get out of the situation. Have you spoke with a realtor or gotten an appraisal done? You really have no idea what the house will sell for until you actually put it on the market and receive a few offers.

It may make more sense to do a refi and consolidate your two loans into one. This may or may not be possible based on what you owe versus what it's worth.

It may make even more sense for you two to dump the house off and just go rent for a while until you can save up the 20% downpayment that is recommended for a house downpayment. Even if you do sell and break even you are going to go buy another house with nothing to put down. That will put you right back in the same situation that you are in now.

[esb3357]

Honestly if you can rent it and break even. Thats what I would do. Honestly thats what i am trying to do.

[ua_guy]

I would suggest getting married as soon as you are allowed to. Either that, or get his name off the deed. Not saying that it is going to happen, but if you two break up it will get really ugly when it comes to that house and the division of assets.

That aside,
It's generally not a good idea to completely wipe yourself out to pay off debts. If you have an emergency of some kind the only solution will be to take on more debt to get out of the situation. Have you spoke with a realtor or gotten an appraisal done? You really have no idea what the house will sell for until you actually put it on the market and receive a few offers.

It may make more sense to do a refi and consolidate your two loans into one. This may or may not be possible based on what you owe versus what it's worth.

It may make even more sense for you two to dump the house off and just go rent for a while until you can save up the 20% downpayment that is recommended for a house downpayment. Even if you do sell and break even you are going to go buy another house with nothing to put down. That will put you right back in the same situation that you are in now.

I'm a little further along in this process than the average squirrel.

Our house has been appraised. We've met with property management folks to determine what we might be able to rent it for. The market is behaving uniquely around us where $400k is kind of an entry point, so we may be able to swing upwards of $350k on the sale of our home, or, worst case scenario is rent it for between $1500-$1700/month. If we refi from 5.375% down to 3.5% we can roughly break even after we pay off the 2nd.

We've strongly considered strategic default. The issue there is that the mortgage-debt forgiveness act hasn't been re-upped (yet?). We are in a non-recourse state, but we'd still be on the hook for that 2nd mortgage. They could sue, garnish wages, etc. At $42k, it seems easier/more prudent to just pay it off versus trash my credit or have to spend to defend myself.

We're approved (not pre-qualified, not pre-approved) to buy a second home on a primary mortgage regardless of why we do with our current residence. That would set us up for the perfect 'buy and bail' scenario, but could really shoot ourselves in the ass- see above re: default and potential taxes owed and the unsecured 2nd. If we paid off the 2nd mortgage, and the bailed on the primary on our existing house, we could owe $35k in taxes if the home doesn't foreclose before the mortgage debt forgiveness act expires. Or, the 1% worst case scenario, the bank decides to pursue a judicial foreclosure and then we're toast.

Without our current home, we are pre-approved for a mortgage up to $1.1 Million. My goal in this scenario is to pay down our current home, wiping out everything I have. That sets us up to buy our 'forever' home with my partner's reserves. Our price range is right around $500k...I don't really need/want a home that costs more than that. FHA will do us for 3.5% down. Worst case...we rent for a while and save money until we find the perfect place or until we have enough down. But we'd still have the ability to buy, good credit, and a choice when it comes to our next place, and for my sanity--walk freely from the wreckage. But that means spending everything I've got to buy our current residence down.

Im just trying to get a feel if this is financial suicide or not; or any better/ worse than the other options. I've dumped over 50k into our current home just in repairs and its still an old house that needs a lot more work.

In case anyone hasn't noticed, banks are f*ing stupid. Because of LTV, they won't refi us with our current structure. But they'll give us another mortgage on a 2nd home. Sometimes I'm tempted to buy and bail...nothing about the transaction would be fraudulent. If I'm going to go broke in either scenario, at least I have the pleasure of f*cking one of the big banks to the wall. This isn't really a moral issue for me...it's weighing the opportunity and speed of the process. There's more opportunity, and it goes quicker, if we just pay everything down versus walk away, buy-and-bail, etc.

I doubt the real estate market is going to come up this next year enough to sell at $450k. If it did, this would all be a moot point.

[bjl584]

I wouldn't go the FHA route. Do traditional financing with 20% down. Also, have a 6 month EF in place when you buy. And, don't spend more than 3x annual salary on the home.

The most prudent think to do is to sell the house and rent for a while until you can save up some money.

[ua_guy]

I wouldn't go the FHA route. Do traditional financing with 20% down. Also, have a 6 month EF in place when you buy. And, don't spend more than 3x annual salary on the home.

The most prudent think to do is to sell the house and rent for a while until you can save up some money.

That's all good advice, but in order to sell, that's going to clear out everything I've got. So, are you saying it's advisable, and then start over with building an EF, gathering 20% down, etc? (I know it's just friendly advice, or maybe you're a financial advisor...I really don't know.)

Why wouldn't you go with a FHA loan?

[Gailete]

Well I'm a little puzzled why you need a bigger house than 1400 feet for two of you. I'm puzzled why you would even be considering buying another house for $500K when you can barely afford where you are at. I'm puzzled as to why the other guy didn't seem to dump any of his money down this house hole. I'm also puzzled why you would need two roofs in less than 10 years. Roofs should last 20-25 years. I'm also puzzled why you would consider walking away from an obligation that you freely entered into (the mortgage and 2nd mortgage) and assume the bank will be happy to pick up the slack. This whole housing debacle has left me puzzled why people were buying homes they couldn't afford and then when they can't blame it on the bank and want to walk away. I would love to see some personal responsibility here. If your friend isn't covering his share of the load financially it is time for a heart to heart talk. If he is and I somehow missed that I apologize. Now that the work is done on the house, why not kick back and learn to enjoy it. Unless the bathroom and kitchen were totally disfunctional (if so why did you buy this house?) those remodels were at your instigation and hopefully you made them to be something you liked. Why walk away now?

I really think instead of blaming this on the house and trying to find some way to get out from under it, find some good excuses why you should stay there and pay things off. Your house is only upside down if you try to sell it, otherwise you should, I think, be paying what you have been all along. Don't think of it as a loss. In 10 years you may be happy to find that it is now worth $500K and will be happy to be living in it then.

Just for an example of what is available, in my area of the country, a 1400 sq ft house can be had for around $100-120,000. A $400K house is a MANSION in the old sense of the word not the McMansion sense. House values change all over the place and you have to pay the piper for where ever you live. You have options. You could move out of that area, but then you probably wouldn't get those kinds of well paying jobs in our area. I just don't think your only options are the scenarios you mentioned. You don't need to be in any hurry to do anything, so think things over in a different light.

[ua_guy]

Well I'm a little puzzled why you need a bigger house than 1400 feet for two of you. I'm puzzled why you would even be considering buying another house for $500K when you can barely afford where you are at. I'm puzzled as to why the other guy didn't seem to dump any of his money down this house hole. I'm also puzzled why you would need two roofs in less than 10 years. Roofs should last 20-25 years. I'm also puzzled why you would consider walking away from an obligation that you freely entered into (the mortgage and 2nd mortgage) and assume the bank will be happy to pick up the slack. This whole housing debacle has left me puzzled why people were buying homes they couldn't afford and then when they can't blame it on the bank and want to walk away. I would love to see some personal responsibility here. If your friend isn't covering his share of the load financially it is time for a heart to heart talk. If he is and I somehow missed that I apologize. Now that the work is done on the house, why not kick back and learn to enjoy it. Unless the bathroom and kitchen were totally disfunctional (if so why did you buy this house?) those remodels were at your instigation and hopefully you made them to be something you liked. Why walk away now?

I really think instead of blaming this on the house and trying to find some way to get out from under it, find some good excuses why you should stay there and pay things off. Your house is only upside down if you try to sell it, otherwise you should, I think, be paying what you have been all along. Don't think of it as a loss. In 10 years you may be happy to find that it is now worth $500K and will be happy to be living in it then.

Just for an example of what is available, in my area of the country, a 1400 sq ft house can be had for around $100-120,000. A $400K house is a MANSION in the old sense of the word not the McMansion sense. House values change all over the place and you have to pay the piper for where ever you live. You have options. You could move out of that area, but then you probably wouldn't get those kinds of well paying jobs in our area. I just don't think your only options are the scenarios you mentioned. You don't need to be in any hurry to do anything, so think things over in a different light.

Gailete, I think you are confused. This isn't an affordability issue. My partner and I collectively make over $200k/year and we both contribute equally to the mortgage, renovations, and other bills. Affording the house has never been an issue, but it's been an extra (needlessly)-tough lesson in sacrifice.

You may have missed but my "friend" that you reference is to become my legal spouse here. We've been together for 10 years and we do share expenses, renovations, and bills equally.

We clearly live in different areas of the country as $350k-$400k is an entry point in the market where I live. Living in "cheaper" areas of the country comes with issues for me...ones that I don't really care to get into on a financial message board. Let's just assume that my work keeps me mostly in highly-populated urban areas of coastal regions, because it does. There isn't a possibility of me moving to a rural area that's not within 30 minutes of a major city (think 5 Million + people) anytime soon.

This isn't an issue of right/wrong for me. It's about what's best for me and my partner, and we've identified 3 options. Right now, the "pay down principal" option seems most attractive because it preserves our credit so we can jump into owning the "right" home for us. The good thing is we have time and income on our side, and after being together for 10 years and in this home for almost 7 years, we've spent a lot of figuring out what we want. And it's coming time to pull the trigger on one of those options.

What I'm looking for is business-savvy advice on how to most advantageously exit this scenario...I think bjl584 has some good overall recommendations and book-advice, but I think what I'm looking for most is someone who's been in these shoes and had to make a choice.

[snafu]

I'm puzzled. Is the house location problematic for where each of you work? Is it realistic to believe house prices are beginning to recover in WA? Have you already seen the ideal house you'd like to buy if not for this 'albatross?'

Sorry you bought a house taking a 2nd mortgage in place of sufficient down payment to avoid PMI. I'm guessing the remediation you've dealt with had to do with reoccurring water problems from roof, window, bathrm, drainage and pests. Was this the result of an incompetent home inspection? With those problems now resolved removing and installing drywall is often considered a DIY job and not expensive. I presume you'll want to replace carpet with hardwood which is popular now.

Is the issue with the kitchen 1968 cupboards & floor with dated appliances? If the layout works, a good paint job and new cabinet handles can quickly upgrade the look to 'charming.' Companies like 'Transformation' can make the ugliest counters look amazingly granite-looking for less than a laminate/Formica replacement. Hardwood looking Laminate flooring cut & click is not an expensive or difficult weekend project.

In your shoes I'd re-mortgage at a significantly lower rate [2.2%] which rolls in the 2nd mortgage if possible using half your savings to get financing in place. Your household income could make extra payments directly to principal reducing the sum 'under water.' Start watching values of homes in your district on-line, comparing value per square foot. By spring you could test the market. By then you could have finished upgrades, found an experienced realtor and have facts to support a realistic price and marketing plan. If you don't like the offers, they can be rejected. If you don't get any offers you'll know it's priced to high. The housing market is a pure form of capitalism.

[Gailete]

Gailete, I think you are confused. This isn't an affordability issue. My partner and I collectively make over $200k/year and we both contribute equally to the mortgage, renovations, and other bills. Affording the house has never been an issue, but it's been an extra (needlessly)-tough lesson in sacrifice.

You may have missed but my "friend" that you reference is to become my legal spouse here. We've been together for 10 years and we do share expenses, renovations, and bills equally.

We clearly live in different areas of the country as $350k-$400k is an entry point in the market where I live. Living in "cheaper" areas of the country comes with issues for me...ones that I don't really care to get into on a financial message board. Let's just assume that my work keeps me mostly in highly-populated urban areas of coastal regions, because it does. There isn't a possibility of me moving to a rural area that's not within 30 minutes of a major city (think 5 Million + people) anytime soon.

This isn't an issue of right/wrong for me. It's about what's best for me and my partner, and we've identified 3 options. Right now, the "pay down principal" option seems most attractive because it preserves our credit so we can jump into owning the "right" home for us. The good thing is we have time and income on our side, and after being together for 10 years and in this home for almost 7 years, we've spent a lot of figuring out what we want. And it's coming time to pull the trigger on one of those options.

What I'm looking for is business-savvy advice on how to most advantageously exit this scenario...

Yes, I'm confused as well as puzzled. I understood precisely what you had said about your friend but you never actually seemed to mention him paying bills as you referred to the money you paid, you only referenced yourself and how hard this was on you. The entire gist of your request seemed to be how could you walk away from your financial obligations to move into a bigger and more expensive home which will never make sense to me. I never even meant to suggest that you move as there aren't a lot of high paying jobs in my area. I only gave that as an example of how housing prices are only arbitrary numbers. It really has nothing to do with the house but the area. As long as you stay put, your house isn't upside down. It is only that way if you are looking at selling it. So instead of waiting for it to go back up in value (which if you planned on being there another 20 years you would never care about) you want to bail and be able to walk away leaving behind your main obligation to the mortgage company. I say that even though you have mentioned several scenarios, you seem to be leaning hard at the bail option. I'm someone that thinks if someone takes up a financial obligation that they should take care of it and not try to walk away.

Houses, no matter whether used or new are money eaters. No house is perfect or 'right'. I'm living in my husband's dream house that he had started long before he met me so many things I had no say in. I would have done things differently, but it is my home for the rest of my life (talk about stress, even if we wanted to sell, we can't due to a clause in the deed that ties his parents to our land until they die, so even if we we were going bankrupt we couldn't sell the house for cash). No matter what you buy or where you go, you will be sinking money into a house constantly. Sorry to be the bearer of that bad news. Moving isn't going to resolve the ongoing struggle to stay ahead of repairs and what not. Even if you don't have to, if you buy a new house you will decide that you hate the color of the kitchen so you paint it and then the cupboards aren't right so you think about replacing them, or there is a new leak in the basement and so it goes. You didn't mention that you two did any of the work in the current house and so if you aren't handy with tools and don't intend to become handy, any repair, etc is going to continue to cost the earth.

Have you guys thought about renting something nice where you won't be on the hook anymore for repairs and maintenance? Maybe not the most advanageous tax wise but may leave you more time to live. Unless you have chronic health problems, you are only 30, your life really hasn't slipped away as much as you think it has. At 30 life is really just beginning in many respects for adults and you should have many years of life to enjoy. I think that you need to stay put or go rent yourself and rent out your currnet home (although renting it out leaves you on the hook for repairs still) and take some time to relax. I would truly look at other factors in your life, as I find it hard to think that if you can afford this house that it is so 'awful' you just HAVE to get out of it (there must have been something special about it that you bought it in the first place--are those things still present and true?). Something in your life is dreadful and causing you stress and I think that it has got to be more than a house that is making you so depressed. Have a few sessions with a counselor and see if they agree that the house is the problem or if it is something else. Could be what you really hate is your job and the house is an easy scapegoat. Just my humble opinion as someone that is more than old enough to be your mother.

[ua_guy]

Lots of good questions above. Gailete, I appreciate the advice.

I can explain the back-story to all this and the play-by-play of what happened in the course of owning this home if anyone wants. From the outside I realize it sounds a bit like a bratty kid who bit off something bigger than he could chew, but I don't think you'd think that if you heard the whole story.

Regardless, it sounds like it may be a good idea to start paying down that 2nd...maybe not from retirement funds, but to maybe do a stepped approach-- pay part of it down, or maybe pay it off, but then wait and see what happens. The options after that are to refi, walk, or spend some more and buy the house down within reach of a sale.

I'm reminded that my heloc-as-a-2nd-mortgage idea wasn't all that bad, though. It allowed me to be free/clear of all terms and conditions of PMI. It's cheaper than PMI, and whereas PMI is purely an expense, repaying a 2nd is at least putting money towards the purchase price of the house. The original goal was to pay it off in the first couple of years using our tax return (mortgage interest deduction), but we took that cash for the repairs instead. We re-fi'd once in 2008, so now at 4 years, that loan is starting to become unweildly in terms of interest paid versus what we would have had to pay in PMI, so it makes sense to make it go away.

So anyway, there's that.

[Gailete]

I’ve gone through 4 house remodels in my adult life and I know how rough they can be. Only one was handled with swift efficiency and that was right after hubby and I got married he redid my kitchen as a gift to me. I was stunned that in two days the entire tear down and rebuild where finished and I had a kitchen again! He worked like a dynamo. On the opposite end when I left my 1st husband my new landlord decided to remodel my kitchen while I was living in and paying full rent for the place. My fridge was in the basement for 6 MONTHS!!!! (I now have found my voice and no one will do that to me again1) So I totally understand the frustration. I also understand PMI and the biggest thing that you have to watch out for is they don't automatically end when they are supposed to. I followed my amortization schedule on my last house like an eagle and the day it should be done I walked into the bank that held my mortgage to remind them to clear it, otherwise they might have kept charging for that for the next year. I think there is a new law about that, but if so it wasn't in place then.

I have just found over the years that some things that we think that are aggravating us isn't really it, it could be something totally different. It is good to find out what before you end up with ulcers or a new mortgage that is too big! As long as you are dealing well with your mortgage and expenses, I would very much be paying down whatever debt needs worked on first.

[JoeP]

I'd look at wiping out the second mortgage in a year, by figuring out how much you need to pay extra per month. You can use a chunk of your savings, and also money left over from your salaries after your expenses. In a year, the real estate market might be much different, so you'll want to get a fresh comp analysis then.

Going forward, my recommendation is to find a home that will serve you both well for 20 years. You should take into account layout, ease of updating kitchen/bath, accessibility (stairs might be out if you have health issues like arthritis), ease of addition, etc. Then put as much cash down as possible while still preserving your retirement and 6 months expenses.

Nobody can accurately predict the costs of home ownership. Most people assume mortgage + taxes + utilities, but as you found out it can be much more. Having an emergency fund and/or a dedicated House Maintenance fund can save you from the financial risk incurred by taking on debt.