Being "Upside Down" on your Home

[WestieMomma]

We are in the process of putting our house on the market. We had it on the market last year for 8 months and no offers. This time we will be lowering the price and also are using a new realtor which I think will be better than our last one who didn't do jack for us.

The problem is our house is in a newer area where they are building like crazy so there is alot of competition there with the new homes. We have been in our house 4 years and are just ready to move away from the area and get into something nicer and bigger. We hate it there and are pretty desparate to get out! This was our first house, we didn't put anything down when we bought it so we don't have a lot of equity in it-were talking maybe $7000 or so we have paid down the loan. We met with two different realtors this weekend and both agree on the general price range we should list the house at. Problem is we are looking to possibly be out $9000 after we pay the realtor commissions and the other closing costs we are required to pay. That doesn't even include if the buyer asks us to pay any of theirs! About $1500 or so we will get refunded a few weeks later from the taxes and we would also get 1 percent back of the realtor commission if we use them to buy our next house which we are planning on doing. We are just sick over the fact that we are probably going to have to drain our savings to get out of this house! I am also worried about how much we will have to bring to the table to buy our next home because after we pay to sell the 1st one there won't be much left. :confused:

We are going to talk to a mortgage person this week so see what our options are. I think we would have to stay in our house another 4 years before we could make some money off the house and it just really isn't an option. DH wants to look into renting it out but I am not sold on being a landlord. He travels all the time for work so he doesn't have the time to deal w/repairs, etc. We could do FSBO but in our area I don't see us having a lot of luck with it and again it's just a time issue/PITA since DH is gone a lot and I would have to do most of the legwork by myself which I don't feel comfortable doing. We feel better just leaving it to a realtor to sell even if we have to pay for it. I think we just need to get rid of the house and chalk it up to a mistake on our part for buying a home in that area!

Anyone ever been in this situation? What kind of options are out there as far as financing for someone in a situation like this? Are you able to roll in negative equity into your next loan? I would hate for us to have to do that though.

[mamax2]

Is your move at all job related or can it be construed at such? I'd talk to your accountant and see what s/he recommends in terms of creative write-offs.

[WestieMomma]

Is your move at all job related or can it be construed at such? I'd talk to your accountant and see what s/he recommends in terms of creative write-offs.

I wish it was but no..just us wanting a bigger and nicer house. If we do end up renting it out then we will most definitely consult an accountant.

[maxandmolly]

I think there are soon to be a LOT of people in this situation, as people who bought towards the end of the boom are now going bust. It is no longer a seller's market out there. Honestly, I would wait it out, at least until you can get to break even. You cannot, that I know of, roll negative equity over with a house the way you can with a car. No lender is (er, no lender SHOULD) allow you to finance a house that you are, from the beginning, upside down in. And if they did the interest would probably be something highly disturbing.
Wait it out.

[villanelle75]

I know it isn't what you want to hear, but I third the suggestion to wait it out. In the mean time, find any extra pennies you can and throw them at your mortgage so you can chip away at the principle more quickly. Even an extra $20/mom helps. That way in another couple years, you'll have more equity and hopefully, the market will have picked up again as well.

If you rent it out, can you break even (which means covering not only the mortgage, but the property taxes, insurance, any property management fees you might pay, HOA, repairs, etc.)? If not, it sounds to me like you can't afford to hold on to it as a rental either. If you haven't been able to save up for a down on the new place, it sounds like you can't afford to have negative cash flow on a rental property either, especially since your new mortgage will likely be higher than your old (since you said you want a bigger place). And if you can afford to not break even on the rent, then it still makes more sense to take that wiggle room you have in your budget and pay down your principle with it while you live in your house another year or two.

I lot of people are starting to be in the same position as you so you are definitely in good (and plentiful) company. I hope you find a solution that works for you and your DH.

[thedoorchick]

I concur with the others, unless you HAVE to move, you should really wait a year or two before selling. Use that time to pay down more on your existing loan as well as saving for down payment on the new home. You say staying in the house isn't an option - I'm curious why? Is it just because you don't want to?

Having owned rental property for quite a few years now, I can say without hesitation that you should not keep the house and rent it out unless you are SURE you are prepared to be a landlord. You have to be knowledgeable of the law and make sure you follow it, you have to either do all the maintenance or contract it out (which cuts into your income), you have to screen tenants properly and handle all their issues. And if there's a vacancy, that mortgage is coming out of your pocket.

[SiValleySteph]

I didn't see how you were going to afford something nicer & bigger. It sounds as if you've saved roughly $9k while living in this house. How will you afford a larger mortgage payment?

What do you think about taking the $9k hit and then renting while saving up for another house? If an apartment is not desirable, check out rental prices for houses in your area. Perhaps they are less than a mortgage payment would be and you could rent a house while saving up for a purchase. Just an idea. Might not work for you.

[Natrat80]

We are in a similar situation. We bought our house in May 05 with nothing down, we even rolled the closing costs into our loan (stupid, stupid). The loan total was $119K. We have paid down maybe $2K of the priniciple in 1.5 years which is ridiculous. We are moving for DH's job and put our house on the market in Jan. and asked $127,900 (it appraised for more than that). We got a full price offer but we're paying $1500 of their closing costs and in the end we're going to be out about $500-which really adds up to our taxes from Jan-March 15th closing date. We don't escrow, so that's why we were okay with having to pay a bit at closing. All that said, it sucks but it happens when you don't put any money down. I agree that you should wait it out unless you are moving out of the area. If you deplete your savings to get out of the house, will you put nothing down on a new house? Then in a few years you'll be in the same boat again!

Not much in the way of advice for you, but for us we realized that next time we buy (in a few years probably) we will have a hefty down payment and get a 15 year loan so we don't get in this mess again!

Good luck to you!!

[Asha]

if you want to move for a bigger house, then imo you need to wait. if you want to move bc the location of your current house is undesirable, it might be a good idea to move. there are always ways to make a smaller home more livable, but there is no way you can improve on the location of your home without moving.

like the pps, i don't see how you could afford a larger home if you haven't been able to put much towards the equity of your smaller home.

we will probably be renting after selling our current home. it is very hard for dh to handle the idea of being a renter and not having his own place, but we both realize we want to be in a more financially sound position to be able to buy the perfect home the next time. yes, we could be approved for a very sizable mortgage, but just because the bank approves you doesn't mean that it is the right decision financially.

[WestieMomma]

Thanks for all the advice! We truly hate the area that we live in and there are other reasons we want to move..not just because we want a bigger and nicer house which we do but some of it has to do with job commute for me, needing more space for future kids, closer to family, etc. We have been there 4 years so it's not like we lived in the house for a year and then decided we hate it in the area. I think we made a big mistake buying in a growing area that is not built up yet because the houses are not appreciating yet-how long will that take to start happening?? I don't know but we don't want to wait another year or two to see if it may improve.

As far as being able to afford a bigger mortgage we can. Without going into too many specifics our combined income is now double what is was when we bought this first house. We also never thought to pay more towards the principle because we have used that money on other things such as reducing debt, etc. We have very little debt-1 car payment and some student loans. We have savings and some other investments that is not liquid so we don't want to touch that if that makes sense. DH is most likely going to be getting a nice bonus in may so that will help a lot but we don't want to count on having that money for sure.

I guess my main gripe is the fact that we made a bad decision in the area that we bought this house so we are basically having to pay someone to take it off our hands if that makes sense. It less about the actual money and more about how it stinks we can't make anything or even break even selling this house.

[WestieMomma]

For those of you that have recently sold a house and are planning to rent-will that have a big impact on your tax situation? We need as much help as we can get for tax write offs. I'm wondering how not owning a home would affect us. I need to find an accountant!

[~queen~]

I agree to stay in the house as long as you can to see if the market can turn around. At least you will continue paying down your mortgage.

But I don't agree with this comment:
In the mean time, find any extra pennies you can and throw them at your mortgage so you can chip away at the principle more quickly.

Save as much money as you can into a liquid account because putting extra money into your mortgage does not give you equity in a declining market. Its like trying to stop a leak on a sinking ship. Make that extra money work for you by gaining interest in a high yield CD or savings account.

All being said... There is no price for peace of mind. Its up to you to determine its worth.

[Asha]

if you decide to rent, you will pay more in income taxes if you don't have an interest deduction, but you will pay less money to the bank. in the first years of a mortgage, most of that money that you pay towards your mortgage company isn't going towards the principal. it will be going towards the interest which isn't building any equity. its putting money in the pockets of your mortgage company. in the long run, its better to save for a higher down payment bc you end up more in the positive. its one of dave ramsey's principals.

[villanelle75]

I agree to stay in the house as long as you can to see if the market can turn around. At least you will continue paying down your mortgage.

But I don't agree with this comment:


Save as much money as you can into a liquid account because putting extra money into your mortgage does not give you equity in a declining market. Its like trying to stop a leak on a sinking ship. Make that extra money work for you by gaining interest in a high yield CD or savings account.

All being said... There is no price for peace of mind. Its up to you to determine its worth.

Whether the market is declining or not isn't really relevant. Even if it is dropping, paying off principle will allow you to get to a point where you aren't upside down, or where you are less upside down, so the market has no bearing. If the market is declining, you are still better off owing less on your house, just as you are better off owing less in an booming market, because ulitmately, the loan will have cost you less in the end. What is really relevant is whether you can get a better return doing something else with that money and to be fair, it extra money on your mortgage isn't always the better choice. It isn't quite as simple as comparing your interest rate to the interest rate that any other investments (like a CD) might make because with a mortgage, you have to take into account the tax deduction in the interest.


Regarding taxes with a rental, you can depreciate the property and decudt that for each year it is a rental. Also, any money you pay to upkeep the property (I think even including HOA, gardening, etc.) and anything you spend on repairs is deductable. (This is not tax advice and I am not a tax expert. This is just my understanding of the way it works.) So while you would lose the interet deduction on your taxes, you would gain other deductions. You'd have to work with an accountant or get into the specifics yourself to see what the differences in deductions would be.

[laura]

Regarding taxes with a rental, you can depreciate the property and decudt that for each year it is a rental. Also, any money you pay to upkeep the property (I think even including HOA, gardening, etc.) and anything you spend on repairs is deductable. (This is not tax advice and I am not a tax expert. This is just my understanding of the way it works.) So while you would lose the interet deduction on your taxes, you would gain other deductions. You'd have to work with an accountant or get into the specifics yourself to see what the differences in deductions would be.

I may be wrong, but I think she meant if they sold their house and became renters.

I have no actual facts here, but it seems like at least the first year for taxes (ie. next year, doing taxes for 2007), you could deduct the $ lost of the house similar to a 'bad investment'? Not sure if that would work, but it's the only thing I could think of.

[villanelle75]

Ohh! Right. I misunderstood since earlier in the thread the idea of the OP renting her place out was mentioned. Nevermind!

[SiValleySteph]

For those of you that have recently sold a house and are planning to rent-will that have a big impact on your tax situation?

Are you itemizing your deductions now? If you're not, it won't make any difference. I ask because I saw you were in TX, and generally houses are less expensive there (then say in CA or the NE). Your mortgage interest might not necessarily be putting you over the standard deduction.

[thedoorchick]

I may be wrong, but I think she meant if they sold their house and became renters.

I have no actual facts here, but it seems like at least the first year for taxes (ie. next year, doing taxes for 2007), you could deduct the $ lost of the house similar to a 'bad investment'? Not sure if that would work, but it's the only thing I could think of.

If you sell your house at a loss, this is not a tax deduction.

[laura]

Oh snap!

[bluberry]

I was in your shoes in 2005 and our house price was sinking...quickly. Not only did we lose our downpayment (5%) plus the equity we'd built over 3 years, but we also had to bring $10,000 cash to the table at closing. :eek: We did FSBO and the buyer had no representation and we still sustained that huge of a loss! Had realtors been involved, it would have been closer to $18-20k loss.

How did we pay it? We borrowed the $10k against my 401(k) account. We paid it all back into my account within one year.

Was it worth it? Yes and no. Yes because we split up and started divorce proceedings 3 months after the sale. Neither of us would have been able to carry the mortgage independantly. I say no because I can't believe the bind we were in! We met with multiple realtors who said that the only option for us is to get screwed over. Some even told us to just file bankruptcy so that we could walk away from the house. Ultimately, we felt that the damage it could do to our credit scores was monumental and opted to pay cash.

This all happened almost two years ago and I'm still skittish about ever buying a house again and possibly having to go through the same thing. It's one thing if your housing market isn't appreciating rapidly and quite another when it's dropping by over 10% a year!

[WestieMomma]

bluberry
Wow! I am so sorry that happened to you. That's a lot of money to be out. I'm curious was your house in a newish area w/new homes being built? That is part of our problem..they are building homes like crazy all around our neighborhood and in our city so we are having to compete with that which means no one in our neighborhood is able to make any money really when selling their home. I figure in a few years it will level off. We've been in our house 4 years now and I can't think of waiting 4 more to see what happens with the market where we are! It stinks!

[bluberry]

Westiemomma: Yep, we were in a new area with another development being built 1/2 a mile away. We were lured by having *new* everything with our own color selections. But the trade-off was having to wait (many) years before the house appreciated at all.

[WestieMomma]

bluberry That is what I figured! We bought a spec home and at the time our neighborhood was probably 50% complete(huge neighborhood/master planned community) now it's completed but everytime I turn around it seems like another new develoment is going up. Anytime I hear someone around here say they are going to buy or build in our area I want to shake them and say, "No! Don't do it unless you plan to stay for 10 years!!!" It's kind of funny because the area we are going to move to is where I grew up-it went through a huge building frenzy about 10-15 years ago but now the area if very established and the homes are now appreciating like crazy. Now if we could only sell our house!

[WestieMomma]

Whether the market is declining or not isn't really relevant. Even if it is dropping, paying off principle will allow you to get to a point where you aren't upside down, or where you are less upside down, so the market has no bearing. If the market is declining, you are still better off owing less on your house, just as you are better off owing less in an booming market, because ulitmately, the loan will have cost you less in the end. What is really relevant is whether you can get a better return doing something else with that money and to be fair, it extra money on your mortgage isn't always the better choice. It isn't quite as simple as comparing your interest rate to the interest rate that any other investments (like a CD) might make because with a mortgage, you have to take into account the tax deduction in the interest.



I agree w/ Queen about the house being a sinking ship. My problem is that..the market here is declining and I would much rather put money into savings, other investments than put anymore towards our current mortgage. Under the advice of our realtor and per the comps in the area, we ended up listing the house for $3500 less than we paid for it. Some of the houses in our neighborhood are selling for $20,000 less than what we paid for our house :eek: It really is a crap situation!

To update things though we put it on the market last weekend. No showings yet, I am really hoping we have some this weekend. We decided to put it for sale now but after 6 weeks if we have had a decent amount of showings and still no offers we are going to think about lowering the price a bit and then listing it for sale or rent. According to the rent comps from the area we would break about even. I still would feel better if we could just sell the house though. Per our HOA we are not allowed to have a "For Rent/Lease" sign up but we may be able to get away with the "For Sale or Lease" on the sign. I guess we'll just have to see what happens. :rolleyes: