Author Topic: What to do with mortgage that is underwater?  (Read 1958 times)

Wads

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  • Age: 32
  • Location: PNW
What to do with mortgage that is underwater?
« on: July 29, 2013, 03:06:49 AM »
First post,  found this website last week and cant believe how badass it is. I'm 26 and bought my first home in the peak of 07. Two years ago I decided it would be best to rent out the home and found myself a nice small MIL apartment I currently rent which is closer to work.

The home is worth 150ish and I owe 204k(30yr at 3.750%). I have plenty of extra money to make additional payments to the mortgage each month but am curious if that's the right thing to do? I do plan on eventually moving back in about 4-5 years. Should I pay down the mortgage between $5-700 a month or choose to invest that in something else while the renter is covering my mortgage payment?

Here is a list of my financial situation:

Income
76,500 ( Base pay, Last year including OT was 127k but on average around 94ish)
Take home: 3,380 (20% taken out for company 401k, matches 50% on first 8%)
Rent Income: 1,300

Expense
Mortgage: 1,300
Rent & everything else: 1,900

Saving:
401k: 57k
Roth IRA: 11k
Prosper: 5k
Capital one 360 savings: 35k (will get this money working for me soon, was planning on another home but now it will go toward index fund)

Debt: ZERO
2009 Acura TSX paid for in cash, will last at least 10-15 years.







« Last Edit: July 29, 2013, 05:05:51 AM by bgt253 »

fiveoclockshadow

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Re: What to do with mortgage that is underwater?
« Reply #1 on: July 29, 2013, 06:20:48 AM »
Two things to consider:

- A lot of people consider long term 3.75% money to be cheap, though how cheap depends on how much if any interest deduction you are actually taking on your taxes.  So don't pay down and invest elsewhere might be sound advice.  However, right now you can not of course get "safe" money at 3.75% so you will be taking on some risk.

- The more underwater the mortgage the less likely to be foreclosed on should trouble come.  This is counter intuitive, but paying down a mortgage actually increases the likelihood of foreclosure in the future for two reasons.  First, you get no "credit" for your extra payments, you still owe the same each month and if you miss you are in default even if you had paid 12 extra months early.  If you pay down a mortgage that money is now illiquid, you'll never get it back without selling the house.  If you kept that money liquid then if you lost your job you could use it to continue to make monthly payments.  Second, banks foreclose on properties with the highest equity first.  They don't want to foreclose on an underwater house since they will be locking in their losses.  On the other hand if the loan is mostly paid off they are guaranteed to get their money back and it is the owner's equity that pays for all the transaction costs.  So trying to "do the right thing" and clear the debt early actually makes it more likely you will lose the house if your income goes away and you start missing payments.

Villanelle

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Re: What to do with mortgage that is underwater?
« Reply #2 on: July 29, 2013, 07:34:53 AM »
I'd put at least a bit of extra money toward the mortgage. My reasoning would be that it would be nice to be in a situation where I could sell if I wanted to. 

You seem to have solid emergency savings, which could be tapped in case of emergency or job loss.

In 4-5 years, what if you don't want to move back there.  What if you feel a need for a place larger than you apartment in 3 years, but you want to stay close to work?  If you are still underwater, you don't have the ability to do that (unless you are willing to cash our investments, even if it is a down market). 

To me, part of having money is having choices.  I'd use a few hundred dollars a month to help by me the choice of selling the place if the desire to do so arose.  It might not be the decision that makes the biggest increase in your net worth (since there's a good chance you can do better than 3.75% with that money in the market), but for me, paying for the ability to adjust my living situation if and when I wanted to would be worth it.  So I'd hedge my bets and put some of that $500-700 in the market, and some of it into my mortgage.