Try to pay off $30k second mortgage early even if you might sell in 1-2 years?

[rocklebock]

I’d appreciate getting some fresh opinions on this situation.

In June 2006, ex-SO and I bought a condo in a HCOLA area for $335k. With 5% down. I know. Part of the financing was a 15-year “balloon” ARM for about $50k, which was the less expensive alternative to PMI at the time. I hear this type of loan no longer exists since the recession. We currently owe $281k between the two mortgages.

In 2011, ex-SO and I broke up (amicably), I moved across the country to take a job with a 30% salary increase, and we started renting out the condo. Quite frankly it’s a terrible rental property investment - we're breaking even on our mortgage and HOA fees, but that's it.

We looked into refinancing in early 2011 and again in early 2013. The answer was that we don’t have enough equity to make this happen, especially now that it’s no longer our primary residence.

We tried to sell this spring, but the offers we got were so low ($285k-$305k) that after two months we decided we’d be better off continuing to rent it out. So we have a tenant back in there on a lease that ends in May 2014.

Back to that second mortgage. We were aware all along that was in our best interest to pay it down, and we did pay off quite a bit of additional principal over the years. Of the $281k we owe, $30k of that is the second mortgage, which is currently at (get ready) 7.25%. Obviously this is a shockingly expensive loan in this day and age, and it’s annoying to me that we still have such a high balance on it after all this effort. BUT, $30k also looks to me like a number that two people making a combined $170k or so can completely destroy in 2-3 years.

Our plan, however, is to put the place back on the market again soon, perhaps even next spring if our tenant decides to move out at the end of his lease.

My question is, does it make sense to try to aggressively pay this loan down if we might be rid of the place entirely in a year or two? Does it make sense to divert money that I'd otherwise use for retirement savings to do this? I get the idea that 7.25% is in the range of what you can expect for average index fund investment returns.

The ex-SO will probably be on board if I go to him with a solid plan. Let me know if I can provide any other information that would help.

[Self-employed-swami]

With such a high income, you should be able to pay that off in under a year.

[Cecil]

BUT, $30k also looks to me like a number that two people making a combined $170k or so can completely destroy in 2-3 years.

$30k is a number that two people making $170k should be able to destroy in 6 months. $2500 each per month kills it fast.

A guaranteed 7.5% is nearly impossible to beat.

[dragoncar]

Yep, kill it in a few months.  Afrer injecting the additional equity, it could also make sense to refinance the primary.

[Self-employed-swami]

BUT, $30k also looks to me like a number that two people making a combined $170k or so can completely destroy in 2-3 years.

$30k is a number that two people making $170k should be able to destroy in 6 months. $2500 each per month kills it fast.

A guaranteed 7.5% is nearly impossible to beat.

I was trying to be gentle, but I completely agree.

[rocklebock]

I appreciate everyone raising the bar so much - seriously. My finances are otherwise in good shape, and since finding MMM I've been lowering my expenses to the point that I might be able to make something like $2500/month work. Not sure I can sell my ex-SO on that, but it's worth testing the waters and seeing what he'd go for.

[Another Reader]

If you got an offer of $305k and you owe $281k, why did you not sell this albatross and be done with it?  You are still involved with the ex until it's sold.  In your shoes, I would write this off as an expensive lesson and move on.  There's no guarantee this property will be worth more next spring.  If it's an entry level property in that market, it may be worth less because of rising interest rates and a shrinking buyer pool.  If you decide not to do that, and the net rental income is covering the property expenses, in your shoes I would just hold it until the tenant is out.  Yes, you might save some interest over the next year, but why not invest the new money in something else that will benefit you in the future?

[willn]

If you got an offer of $305k and you owe $281k, why did you not sell this albatross and be done with it?  You are still involved with the ex until it's sold.  In your shoes, I would write this off as an expensive lesson and move on.  There's no guarantee this property will be worth more next spring.  If it's an entry level property in that market, it may be worth less because of rising interest rates and a shrinking buyer pool.  If you decide not to do that, and the net rental income is covering the property expenses, in your shoes I would just hold it until the tenant is out.  Yes, you might save some interest over the next year, but why not invest the new money in something else that will benefit you in the future?

This.

[rocklebock]

Ha! I pitched the <1 year plan to the ex-SO and he came back saying he'd be more comfortable with a 2-year plan! He needs to talk to y'all.  He agreed to "crunch the numbers" to see what works.  I could probably talk him into raising the payment more later once he sees that the universe isn't caving in.  The sad part is that I'm pretty sure he has over $30k in a bank savings account right now - he's really wed to the idea of "emergency savings".

As far as the question of why don't we just cut our losses - believe me, I've had that conversation or something like it with myself and anyone else who would listen many times in the past two years. I talked ex-SO into accepting the $305k offer (I threw down the gauntlet and said I'd absorb 100% of the closing costs myself), but it fell through. The unit we own is great, but there are serious (and obvious) maintenance issues with the building that make it a hard sell. Ex-SO is on the condo board now, so hopefully we can start getting those issues addressed before we put it back on the market.

Modified to add: The tactic of "invest the new money in something that will benefit you in the future" was my original plan. As I realized I was never going to recover the sunk costs on this place, I decided to just start investing as much money as I could in other places (An IRA and a 457 account right now). My student loans will be paid off at the end of next week, and I think I'm just tempted to continue getting rid of debt as fast as possible.

[dragoncar]

How wed are your finances?  Would he agree to pay the interest on the remaining amount if you pay off your "half" first?  Ie do you have to contribute in equal amounts at the same time?  Paying off your half ASAP might light a fire under his butt.  Pay off his half and have him pay you the 7% interest :-)

[rocklebock]

Aside from a joint checking account that's used only for paying the condo expenses and collecting rent, our finances are not wed at all. Paying my "half" at a faster rate might work, especially if my savings rate continues to escalate and he won't budge.