Help a Reader: House Underwater

Here's a question a reader recently left here:

We currently owe $175,000 on a townhouse worth $150,000. We would like buy a bigger house but don't know what to do...rent this townhome and buy another? Can we buy another house (which we plan on staying in for awhile) and take out a loan on that to pay the difference on the townhouse and sell that? Is that possible?

Any suggestions?

Comments

[CitizenKnow]

The keyword here is "like". You want to live in a bigger home but its not practical at this time, given your current financial situation. Don't compound your current problem. Concentrate on paying down your mortgage until it flips right side up again.

[Ray]

That is not a good situation to be in, why are you looking to accumulate more debt? Isnt that the reason why are in the middle of this crisis. Just stick with what you have and payoff the mortgage.

[BobL]

First off, talk to your lender. They want to help you - they really don't want another house that they will then have to sell well under $150k as a foreclosure. There are now some government programs that might allow them to adjust your mortgage to an amount that reflects the current value, or they might just write off some of the loan. It surely doesn't hurt to call and ask what your options are.

After that, see the comment from CitizenKnow.

[Chris Brooks]

This person is in no business buying another home - unless you can get 20% down payment, the risk is too high. My advice: sell the condo, even if it means a short sale, live cheap and rent for a while, save an emergency fund, then save enough for a 20% or greater down payment on their next home.

[George]

There's no reason to sell the condo as long as you're able to make the payments (which you should, since they should be the same as when you got the mortgage - if it's an ARM you need to refi into a fixed rate).

Stay in the condo, pay down the mortgage, and sell it when you're no longer upside-down on the loan. Right now you have no business getting into a larger house - make do with what you have and you'll do better in the long run.

[Mr. ToughMoneyLove]

"Can we buy another house (which we plan on staying in for awhile) and take out a loan on that to pay the difference on the townhouse and sell that? Is that possible?" Did the reader really ask this question? If so, this question alone demonstrates that this reader is not ready to buy another piece of real estate.

[Ray]

"My advice: sell the condo, " why sell the condo? I dont see a point in doing that, you would take a $25K hit when u dnt have to.

[Jim]

I agree with the first comment, the keyword is "like". They should stay where they are until they can afford buying another.

"Can we buy another house (which we plan on staying in for awhile) and take out a loan on that to pay the difference on the townhouse and sell that? Is that possible?"

Toughmoney is right, that question is concerning. Unless we're missing something it sounds like they think that they could somehow get money out of another home? Where would that money come from? Given the question I'm assuming they don't have money in the bank to cover the shortfall on the townhouse. You can't just take a loan on a house unless you have sufficient equity in it. Unless you've got a lot of money in the bank to put down as a downpayment then you won't have any equity in the home.

[Miss M @ M is for Money]

I'm underwater much further than that, the only choice is to stick it out as long as you can make the payments. You generally can't get a short sale unless you show economic hardship, if you are making the payments and still employed then there is no hardship. The only choice is to wait it out, don't buy a house unless you are ready to stay in it for a decade or more. I'm now resigned to raising kids in 750 sq ft or until I can save enough of a downpayment to buy a bigger place. At least I have a roof over my head and some day this will pass.

[bob]

I am a lender.

No you can not do that. You would have no prayer of getting another loan, regardless of whether you rent it out or not. That rental income would not count - no history of it.

Everyone before me is 100% correct. You are in a bad spot. Don't make it worse. You can't "borrow" your way out of debt, and that is what you are trying to do.

[rdub98]

First of all, your house is worth $175,000. It is only worth $150,000 if you sell it. That house is providing you with a roof over your heads and protection from the elements. I wouldn't worry so much about it right now. There is a psychology to debt and personal finance and it sounds like you are falling into one of the bigger traps: immediate gratification (also known as keeping up with the Jones). Don't be in such a hurry to "move up" ESPECIALLY if you have other debts. Get your debt paid off or at least WAY down before you even consider selling your current home. If you have to take out debt to pay debt, you are not managing your debt properly.

I was on the brink of bankruptcy after my divorce. I bit the bullet and paid off as many debts as quickly as I could. I now only have a HELOC and a mortgage left and the HELOC will be paid off shortly. Take it from me, you have to have will power just as much in personal finance as you would in exercise, dieting, or any other hard to accomplish task.

If you don't have any other debt, then pay as much as you can on your mortgage and get that down to the "value" of the condo, then start saving up for that down payment on the next house (enough to put 20% down). It will take a while, trust me, but you will do it without incurring more debt or a debt load that you can't handle.

[daryl]

I'm so impressed with all the sound contributions for this couple/person to make an intelligent decision. It's all good from just about every angle possible. Buy a lottery ticket maybe this is your weekend...problem solved...unless you need advice on how to save it too for the future.

[Maria]

So much depends on the circumstances of the home owner/s. If the monthly budget is tight or they are having trouble making ends meet in their current circumstances, then all of the above advice is valid.
If on the other hand, they have additional discretionary income, are good savers and otherwise in a solid finanicial position or will be making more in the immediate future (good career, advanced degree pending or spouse going back into the work force), they have options.
It isn't being upside down in the current house that matters, its how much they will be putting down on the new house that concerns me.

1. If they can buy what they want at bargain prices, it is something to consider. What if they can buy up for the same monthly expenditure?
2. Even thought lenders will not offset current mortgage with expected rental income, if they qualify for both mortgages (and can afford it in the worst case scenario), the tax advantages are well worth considering. If they keep it, depreciation and pricipal paydown work in their favor. If they choose to sell after required holding period (check w/ IRS or tax professional) any negative equity is then tax deductible.

There is alot of discussion about accumulating assets for the future, there is nothing wrong with real estate. There's volatility in any asset class.
Personally I had GE, BMY and IBM and lost a ton.
I've made and lost money in mutual funds.
I've owned many properties in almost 30 years and they have had ups and downs in value.
No asset's value is guaranteed. The trick is sell when you can NOT when you have to.

[steve]

First of all, you say "worth $150,000". Does that mean what you'd list it for or what you'd net after closing costs. If it really is worth $150,000, it's probably worth less(everybody thinks their home is worth more than it really is). Commission, attorney fees, tax stamps, etc, etc, etc. You're probably down to $135,000 to $140,000 at best. If you walk away, your credit will be shot for awhile. If you take a loan to pay the difference, add that amount to your new house and you're going farther backwards. Either suck it up and stay, or walk away and wait 5-7 years for your credit to rebound. You should have a good amount saved by then.

[kitty]

"Can we buy another house (which we plan on staying in for awhile) and take out a loan on that to pay the difference on the townhouse and sell that? Is that possible?" Mr. ToughMoneyLove is right. If you have to take a loan to cover this difference it's likely you cannot afford to move.
You cannot afford to buy a new house unless you have the money to either
a) pay the bank 25K AND make downpayment on the new house or
b) rent this home and afford the new house at the same time - to do that you need to be able to get enough in rent to cover your expenses AND be able to afford carrying expenses on two places if you
cannot find tenants for a couple of months or more.

If you cannot do either then you cannot afford a new house. Stay where you are and save money. BTW - if you cannot rent out your current home and get enough in rent to cover your expenses than it's likely the house prices can still come down. When this happens the difference between more expensive and less expensive places gets smaller. So if you wait, even if your home loses more value, the value of a house you want to buy is likely to drop even more.

"Personally I had GE, BMY and IBM and lost a ton. "
When did you buy IBM? It is down less than 10% from December 2007 ($109 on 12.31.07 vs $101 last Friday). Sure during 2008 there were a couple of brief spikes to $120, then drop, then $130 then drop, but this was for a very short time. Did you buy during these highs?
I do agree, by the way, that there is nothing wrong in upgrading if you are upside down as long as you have the money to cover the difference on the old home, pay down payment on the new home and can afford the new home. When I bought my current home in 1997, the family that sold it to me had to add their own money during closing to pay off their mortgage. They had bought in the 80s when the prices were much higher. I'd imagine the value of their new house has grown enough since then to compensate them for their check. Even with current drop the prices in most areas are well above 97 levels.

But I am suspicious that the person who asks can't really afford to move.

[Maria]

Kitty,
I bought GE and IBM in Jan 02. Sold IMB in Oct of that year. Sold GE recenly. Bought BMY in Jan 01 sold one of the many times it hit $17. I didn't need the money, just decided to trade into mutual funds (better for my peace of mind). It showed me I wasn't good at picking individual stocks. On the real estate front I'm much better at finding winners. I like to keep the house Im moving out of. To me that makes the most sense. I know the repair history, the neighborhood, and I have great financing. It is worth considering, but only if your prepared for it. Makes more sense than writing a check to the bank at closing.

[JayC]

Seems like some knowledgeable people are on this thread so I'll add a twist. I am in a similar situation as the poster, but with one key difference: my wife commutes 1 hr each way to work, and with Chicago traffic, that can become 2 hours. It's become unmanageable for her to pick our toddler up at daycare before they close and I cannot, so we're realizing we have to move if both of us are to continue working and sending her to daycare. We too are likely 10-20K underwater on our house if we tried to sell today, with stellar credit but not enough in the bank to pay off that difference. There's a bank-owned house much closer to both our jobs that costs $330K, and we owe $250K on our current house. I've read some about seller financing. Is this something the owning bank might consider to help move the house?

[Rick]

My condo is underwater by 50k, I rent it out but still have to dump considerable money into it. I am desperate to get rid of this place. Question.... Can I sell it, and simply owe the difference to the bank in a smaller loan?? I don't want to do a short sale ot file bankruptcy.