Upside down mortgage - WWYD?

[altjat37]

This is our first home. We bought it 7 years ago for $87k. Our interest rate is 6.5% and we pay PMI insurance. Our balance on the loan is $79k.

We need to move. We have 3 children now, and this house no longer fits us. We are NOT behind on payments - in fact we have excellent credit (800+ credit score). However, our house is now for sale and we are faced with the reality that we will not be able to sell it for enough to pay off our mortgage. Realistically, we will be short by at least $10k.

(We are pre-approved for a new loan with a 4.75 interest rate, and it's a USDA loan so NO PMI - so a MUCH better deal than we have now - and we can find a house that suits us better for a lower payment than we have now).

But we have to get rid of our house first. Renting it out is not an option (many reasons).

Do banks ever consider short sales if you are NOT behind on payments? Would it be foolish to take out a personal loan and use that to pay off the mortgage balance (as quickly as possible - < 5 years)? With our excellent credit I don't think we'd have a problem getting one. I realize it has a high interest rate, but if we sold our home we would be saving significantly in the long run...

We are just so frustrated and not sure what to do. We could possibly scrape up the difference of the mortgage to bring to closing, but it would leave us with NO savings at all - which I don't want to do. I prefer to keep at least an "emergency fund" of 2-3 months expenses saved up.

Any other options here I haven't considered? I was told that "bridge" loans don't exist anymore - is that true? Any ideas? Thanks.


ETA: More info on our situation that may be helpful for advice:
We are 30 years old. No credit card debt, no car payments. Our only big debt is our mortgage. I am a stay-at-home mom and my husband works for a non-profit making around $30k. Last year we started a small side business and have saved all of our income from that - we have about $11k saved. Before that, we were living paycheck to paycheck. We were hoping to use this savings to get into a new house. Now that we know we can get a 100% loan (at a great rate), we won't need anything for a downpayment or closing costs. So we *could* possibly scrape together enough to pay off our mortgage if needed. Would that be unwise? It's definitely depressing, considering we've made improvements and taken care of this house - and it's value has decreased so much through no fault of our own But not sure what is the smartest move at this point to get out of the house.

[Shewillbemine]

How big is the house?

[cschin4]

You aren't necessarily "losing" money if you sell for less. You need to think about this differently. You have lived there for 7 yrs. How much would it have cost you to rent for 7 yrs for a family your size over 7 yrs? Perhaps $800/month x 12 months is $9600. x 7 yrs is $67200!
So, in reality, if you are selling even at a LOSS, you have not lost money. Do not try to make this complicated. Get your house looking great, fresh paint, whatever. Put in on the market at a reasonable price and then move on with your life.

[Joan.of.the.Arch]

Have you thought about adding on to your house instead of moving?

[bjl584]

I like the idea of staying put and maybe building an addition or perhaps doing some renovating to add some space. Something like finishing the basement to add rooms.

[snafu]

I realize that every region has different economic factors but I wonder if you may be hasty, driven by your desire for more space. The housing sector will recover, there is built-in demand and we are already seeing significant change. Sales have gone from dead to balanced since just February, surprising even realtors since this includes a major change in our mortgage rules.

I question whether DH income can support a larger home with resultant higher costs [taxes, utilities etc.]as we move into inflation factors. Just because you CAN borrow more, doesn't mean you SHOULD borrow more as it has the potential to keep you house poor.

Meanwhile, as you 'stage' your home in preparation to list, consider what changes you could make to make this house more spacious feeling for you and the family in the short term. Perhaps if there was less stuff, it would be more comfortable. If clutter were banished from every flat surface, floor space, closets and cabinets you would not feel so cramped. Since you will need to pack-up to move, I suggest you start the process now so that only items you love and use regularly remain in every room. You may need to rent a storage cube until moving day but the house will be easier to 'show' during that stressful time.

With better weather, you can plan more outdoor living/activities for yourself & DKs which hopefully eliminates feeling constricted. Should you decide now is not the time...you have the option of cancelling your sale contract.

[Hector]

You aren't necessarily "losing" money if you sell for less. You need to think about this differently. You have lived there for 7 yrs. How much would it have cost you to rent for 7 yrs for a family your size over 7 yrs? Perhaps $800/month x 12 months is $9600. x 7 yrs is $67200!
So, in reality, if you are selling even at a LOSS, you have not lost money. Do not try to make this complicated. Get your house looking great, fresh paint, whatever. Put in on the market at a reasonable price and then move on with your life.

Interesting calculation. Dont they need to count mortgage payments, fess and expenses associated with owning a house, down payment and opportunity cost associated with this investment? If all these adds to more than 67k, its a loss.

Thats not the point. People need to know that taking mortgage on primary residence is not about investment. It is about lifestyle.

[Hector]

I dont know much about mortgage. Isn't it possible to refinance current mortgage and get cheaper rate? If one can get better rate for more expensive mortgage, why cant current rate be reduced?

Lets say if OP is selling current house at loss of 10k, does that mean they will have two mortgages? 10k for current house and new mortgage? If so and they can afford that payment and if they MUST leave, isn't that an option?

I dont think its a good idea to use that EF of 11k and have no EF at all.

[MonkeyMama]

Personally?

I would re-evaluate the *need* to move. I come from a High cost of living area. People make do with far less space all the time. So, this is my inital reaction.

I wouldn't do a short sale.

Bridge loans are a horrible idea - even if they exist. Very risky.

I suppose I would sit tight and wait until I was a better financial position to move. My gut reaction is that moving is probably cheaper than an addition. I don't think an addition is a good idea (would be costly, wouldn't it?). Could be regional bias - it would be much cheaper here just to BUY a bigger home.

That said, there is nothing I like about the idea of borrowing for the new home with 0% down. You are just trading in one mess for a potentially bigger mess. You are fixated on "payments" and not the big picture of starting out in another position to be stuck and upside down all over again.

If you were actually in a better financial position, I would just sell the house, borrow/pay the difference, and move on. But I think you are better off to stay put and waiting things out a bit. Save up more money and move when it makes financial sense.

[altjat37]

"Thats not the point. People need to know that taking mortgage on primary residence is not about investment. It is about lifestyle."

Our home is very modest and within what we could/can afford. However, we bought it newly married under the understanding (perhaps inaccurately) that buying is smarter than renting, that we would live here 5 years or so, improve the house, and sell it later to move into a home for a family.

"I question whether DH income can support a larger home with resultant higher costs [taxes, utilities etc.]as we move into inflation factors. Just because you CAN borrow more, doesn't mean you SHOULD borrow more as it has the potential to keep you house poor."

I understand what you're saying. Maybe I wasn't clear though - we have looked around and can get a loan for the same amount we owe now for much more house, still owe the same amount on a mortgage, but with NO monthly PMI and an interest rate almost 2% lower. So we are not looking to spend more money than we can afford, not at all. Whatever next home we move to will likely be the last home we own until after our kids are out of the house (they are toddlers now!). Although I listed his income as 30k, we do have a second "work from home" business that we started 1 year ago - but since we don't know how long that income will last, we are just saving it and it is not used for living expenses.

"I like the idea of staying put and maybe building an addition or perhaps doing some renovating to add some space. Something like finishing the basement to add rooms."

Sadly our tiny lot won't allow any additions, or we would consider that. This is another reason we want to move - we have shifted our lifestyle to be very frugal/simple and we are expanding growing our own food, etc., and are limited by our lot. We also are not allowed to keep chickens, etc., things that also would help us maintain the simple lifestyle we are after.

"You aren't necessarily "losing" money if you sell for less. You need to think about this differently. You have lived there for 7 yrs. How much would it have cost you to rent for 7 yrs for a family your size over 7 yrs? "

I don't follow you... We have paid $750/month for 7 years. We could have rented a similar house for about that same payment. But we have also put a LOT of money into this house - in the past 2 years alone - new roof, furnace, carpet, etc. We have taken good care of this house and if the market were the same as it was when we bought it, we would be coming out ahead. We definitely have lost money. And I'm ok with that, because if we were seeking a bigger house in a different market now - we'd be looking at paying a lot more there too.

Thanks for the input. The house is for sale now and we have done everything possible to improve it to hopefully sell. We listed it for $80k so even if we get offered that (not likely), we will have to bring about $6k to the table after fees, etc. My real dilemma is - do we use our savings, try for a personal loan or such (and pay back ASAP of course), or if there were any other options...

[altjat37]

"That said, there is nothing I like about the idea of borrowing for the new home with 0% down."

Well, we bought this home with 0% down, 6.5%, and we pay PMI. After 7 years we still owe $79k, so that's pretty bad too.

A new loan would be 0% down, 4.75%, and NO PMI (we would likely pay extra toward the principal each month instead).

So to me, it seems like this is obviously the best choice in the long-run - since we will be borrowing about the same amount ($80k) and it will be a house we can live in for many years - if not forever. If I gave the impression that we are trying to borrow MORE money, that's not the case. We still plan to buy another house in the same price range - the only difference is that can get us much more house now than it did 7 years ago!

We have no intention of living beyond our means. Even though our income is low, we are very frugal and our credit score reflects that we only take on obligations we can afford.

[cschin4]

"You aren't necessarily "losing" money if you sell for less. You need to think about this differently. You have lived there for 7 yrs. How much would it have cost you to rent for 7 yrs for a family your size over 7 yrs? "

I don't follow you... We have paid $750/month for 7 years. We could have rented a similar house for about that same payment. But we have also put a LOT of money into this house - in the past 2 years alone - new roof, furnace, carpet, etc. We have taken good care of this house and if the market were the same as it was when we bought it, we would be coming out ahead. We definitely have lost money. And I'm ok with that, because if we were seeking a bigger house in a different market now - we'd be looking at paying a lot more there too.

I am just making a point, that these calculations are not cut and dried. That there would have been a real cost to living no matter where you were. And, if you were renting, it is money you would have spent to live. So, that even if you sell for less, then technically you might not be out as much and in fact might be further ahead having owned. There are many ways to look at it. Those who just look at x = x are not taking in other factors.
But in reality, it all becomes a big "so what". I am not being "smart" but the reality is what matters now is what matters now. You can look at how much you spent, invested, put into the house, etc, but what matters now is what the house is going to realistically sell for. It is what it is. It is worth market value and no more. It is only worth what someone is willing to pay and what you are willing to sell for. You can ask any price you want but you will only get what someone thinks it is worth.
I guess i see a lot of people who allow money to get them "stuck". They don't move on with their lives or situations because of not wanting to take a loss or not getting what they think they deserve, etc. But, that can also paralyze you in moving ahead with life. Sometimes you have to just be patient and sit and wait for the right buyer. Sometimes you just take what you can get and move and realize the cost of continuing to own a home you no longer need or want, the cost of maintenance, taxes, upkeep of an empty home if you have moved on.

[disneysteve]

This is our first home. We bought it 7 years ago for $87k.

our house is now for sale and we are faced with the reality that we will not be able to sell it for enough to pay off our mortgage. Realistically, we will be short by at least $10k.

We could possibly scrape up the difference of the mortgage to bring to closing, but it would leave us with NO savings at all - which I don't want to do. I prefer to keep at least an "emergency fund" of 2-3 months expenses saved up.

Now that we know we can get a 100% loan (at a great rate), we won't need anything for a downpayment or closing costs.

Our home is very modest and within what we could/can afford.

So we are not looking to spend more money than we can afford, not at all.

we bought this home with 0% down

A new loan would be 0% down

We have no intention of living beyond our means.

Based on what you've posted thus far, I think you seem to be saying one thing - "We have no intention of living beyond our means" - but doing something very different. You bought your current home with 0% down and are now upside down and likely selling it at a loss so that you can turn around and buy another home with 0% down, possibly burning through your savings in the process. I'm not sure how you are perceiving that as living within your means.

In order to move, you should have:
At least a 3 month EF saved after covering any expenses from selling and moving
20% down payment for the new home
New mortgage payments should be less than 28% of your monthly income

What you are proposing is jumping out of one pit into another even deeper pit.

[nick__45]

If you don't have money, don't buy/sell house in this economy. You'll end up costing yourself money in closing cost from the sale as well as the buy. Just bundle up and live a cozy life where you guys will spend more time to each other. The idea of everyone needing their own space is ruining this country and enrich only a few.

Trust me, I made a mistake of buying a 6-bedroom house for 2 people. I never see 4 of the 6 rooms nor the finish basement. Meanwhile, I could use a nicer commuter vehicle.

[frugalgirl]

It sounds to me like you have already made up your mind that you are moving and nobody is going to convince you otherwise. The worst thing you can do IMO is to take out a high interest personal loan to pay the difference between what you owe and what you sell for. How is that any better than paying PMI? If you are determined to move, then you should focus on saving every last penny you have and increasing your income so you can pay off house #1 and start replenishing your EF that you are going to use to pay off the bank and move. Taking on a second loan to get out of the first house seems like putting another anchor around your neck.