Author Topic: What to do with our upside-down mortgage?  (Read 4499 times)

garion

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What to do with our upside-down mortgage?
« on: February 15, 2015, 02:09:11 PM »
Hi all!

My husband bought a house back in 2008 (before I knew him!) and it has decreased in value substantially. I'm hoping you mustachains can help me figure out what the best plan of action is going forward with this.

The house is currently valued at about 80K (Zillow estimate, so take that with a grain of salt), and we owe 100k on it (at 4.9%). We do not currently live there. It is in a suburb that is far from where we both work, so we are renting a house closer to where we work and renting out the house. We have a good renter there now who pays exactly the price of the mortgage per month ($825), so it only costs us in repairs and other random expenses (like when a tree fell on it last summer!). The house we are renting is about $100 more per month, but I figure we make up for that entirely and then some  in gas savings combined with the quality of life increase of not spending multiple hours per day commuting.

We currently have pretty good cash flow (about 7k take home/month), but I also have just under 60K of student loans at 6.8% that I'm trying to pay down ASAP. We pay about 1k/month on these.

I think we were hoping that the value would go back up so we could sell it, but it hasn't. We are also running into a number of complications:

1. I am hoping to go back to school this fall for my PhD. I will NOT be taking out additional loans to do this, but it will mean that our take home pay will decrease as I will be earning a small stipend. My husband is planning to find a job in the new city that pays about what he is earning now (he doesn't foresee much difficulty finding work in his field).

2. I haven't figured out where I'm going yet, but it will definitely be out of state/at least a 5 hour or so drive from where we live now. This means it will be harder to be landlords on this property. We could hire a management company, but this would cost us out of pocket every month.

3. We have been lucky with our current tenant, but we don't know how long he will be with us, and I'm skeptical about our ability to secure another good tenant. I'm afraid he will leave right as we are getting ready to move, and we will be stuck paying the mortgage.

Anyway, does anyone have any advice? I really don't want to do a short sale, but I also don't like the idea of saving up money to pay back the bank in cash, especially when I'd rather be paying down loans. We could keep on hoping the value will go up, but I don't know when/if that will be...

Also, there has been some talk about a developer buying up this land, but I don't know when that will happen or what price they would pay.

General headache all around, but I'd appreciate some of your genius advice!

mozar

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Re: What to do with our upside-down mortgage?
« Reply #1 on: February 15, 2015, 05:07:37 PM »
Can you get a loan modification, maybe using HAMP once you start the phd program?

Unless you have an appraisal you don't know what it is actually worth. And you could try putting on the market anyway and see if you can sell it at a high enough price to cover everything.

I can understand not raising your rent on the current tenant but you definitely should for the next since they are not covering all your costs. What is the market rate for rentals in that area?

aspiringnomad

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Re: What to do with our upside-down mortgage?
« Reply #2 on: February 15, 2015, 07:28:23 PM »
You're not that far underwater, at least in absolute terms. I can't see how 20k is worth going through a short sale, especially when the rental is cash flow neutral (and a positive return when you factor in principal paydown).

My two cents:

1) Try to find out how long your tenant plans to stay so you have more complete information concerning that.
2) Do whatever it takes to find a trusty handyperson/contractor before you leave the area.
3) Move where you need to move for your PhD and budget as best you can for repairs that need to be done (hopefully you can coordinate remotely through the trusted tenant).
4) Reassess once you're back above water or willing and able to cut the bank a check for the difference.

MayDay

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Re: What to do with our upside-down mortgage?
« Reply #3 on: February 15, 2015, 07:52:20 PM »
I have no ethical problems with foreclosures or short sales but I wouldn't do it over 20k.

I would:
1. Offer your tenant a 2 year lease at his current rate.
2. If he says no, try to sell it and bring money to closing,
3. Unless you can't come up with 20k by summer, in which case just keep renting it at market rate, and find either a property manager or good handyman.

garion

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Re: What to do with our upside-down mortgage?
« Reply #4 on: February 15, 2015, 08:41:39 PM »
Thanks everyone for the advice and perspective! You all are right, this is  not ideal but also not dire. It could definitely be a lot worse.

We are going to see if we can use HAMP to work out a lower monthly payment. We can also raise rent slightly for the next tenant, so between the two of those we'll be able to cover our costs. It looks like market rate for rent has gone up somewhat in the area since we last checked. We could probably charge about $100 more. And we definitely need to find a good handyman. So far, my husband has been doing all of that himself.

And hopefully we will be in the position to sell sometime soon!

Thanks again for the advice!

mozar

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Re: What to do with our upside-down mortgage?
« Reply #5 on: February 15, 2015, 08:52:16 PM »
A couple of caveats I forgot. You might make too much for HAMP and it might be owner occupied only. But they might have other loan modification deals.

garion

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Re: What to do with our upside-down mortgage?
« Reply #6 on: February 15, 2015, 09:13:15 PM »
A couple of caveats I forgot. You might make too much for HAMP and it might be owner occupied only. But they might have other loan modification deals.

According to their website, rental properties are eligible. It's true we might make too much right now though. But we might be eligible once we are making less.

ETA: Actually, scratch that. I had the dates wrong, he actually bought the house a bit too late to be eligible. Oh well.
« Last Edit: February 15, 2015, 09:22:59 PM by garion »

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Re: What to do with our upside-down mortgage?
« Reply #7 on: February 15, 2015, 09:38:35 PM »
Are you taking full advantage of all the tax deductions / breaks you can get from having a rental property which you as owners are fully managing yourselves?  These tax breaks can be substantial and could in essence shelter some of your salary income from taxation.  The IRS has a whole publication devoted to this.  It can get complicated, but it could be well worth it.

Retire-Canada

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Re: What to do with our upside-down mortgage?
« Reply #8 on: February 16, 2015, 07:39:21 AM »
Put it up for a private sale for $110K and see what happens. Best case you get rid of it without losing money. Maybe you get an offer for $95K.

My GF has been dealing with a vacation rental property she bought before we met [6yrs ago] that has never come back up to the loan value once it dropped.

We earn about the same, but that property is a real drag on her ability to save as it costs more most years than she can make from it.

I told her to sell at a loss or walk away from it 6yrs ago. Things haven't improved in that time and she's going to work a bunch of years after I retire to make up that lost $$ as she will eventually lose all the money she has put into it these last 6 years AND whatever she sells it for that's less than the mortgage value.

I have always been of the mind to not let sunk costs from bad previous decisions sway your choices going forward.

-- Vik
« Last Edit: February 16, 2015, 11:59:50 AM by Vikb »

Mr.Chipper77

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Re: What to do with our upside-down mortgage?
« Reply #9 on: February 16, 2015, 10:08:44 AM »
I agree ^ dump it and move on. It could cost you more in some major maintenance event and or price could drop further.  Its not that big a sum in the big scheme of things so move on from it.

garion

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Re: What to do with our upside-down mortgage?
« Reply #10 on: February 16, 2015, 11:56:54 AM »
Dumping it does sound like an appealing option... We could probably scrounge up $20K before we move, but I also want to have some cushion around for the uncertainties involved with moving. I think we'll keep selling it a priority, but maybe wait another year or so.

Thegoblinchief

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Re: What to do with our upside-down mortgage?
« Reply #11 on: February 16, 2015, 12:37:20 PM »
At least talk to a realtor or three. Have you done any research on comps besides the awful Zestimate?

garion

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Re: What to do with our upside-down mortgage?
« Reply #12 on: February 16, 2015, 01:51:49 PM »
At least talk to a realtor or three. Have you done any research on comps besides the awful Zestimate?

Prices on houses sold in the neighborhood are all over the place, from $49k (!!) to over $100k... We really do need to consult a Realtor.