Upside down. Now what?
February 20, 2009 12:51 PM Subscribe
Upside down in our mortgage like so many others in our area. Now what?
Several years ago, we bought a house for $400,000. We put money down, and split the mortgage into a primary and HELOC to avoid PMI and have room to do later home improvements. The primary mortgage was a 7 year ARM that will reset in 18 months. A year into the house, it was valued at $485,000 and we started our improvements. Currently, we owe a total of $399,000. Now, the mortgage holder says they value the house at $305,000 and we cannot refi without paying nearly $100,000 off first. (If it matters, our credit scores are just above 750.)
Our home is part of an HOA and has lost less value than the neighborhoods around us which are not part of the HOA. For example, similar homes two blocks away are being assessed by the county at $250-260K and we're at $325K.
We have good, stable income and the monthly payments are not a problem for us at all. When we bought, we were pre-approved for a $500,000 mortgage. We have never missed or even been late on a single payment.
Now what? Do we just wait and hope the value of the house comes back up enough in the next 18 months to allow us to refi out of the ARM and into a fixed? Do we take one of the other options available? If so, what option is best? I'm not necessarily trying to reduce our monthly payments (though that would be nice). I just don't want to get totally screwed in 18 month if rates go up (it is at 5 3/4 until then) and we're still unable to refi.
Several years ago, we bought a house for $400,000. We put money down, and split the mortgage into a primary and HELOC to avoid PMI and have room to do later home improvements. The primary mortgage was a 7 year ARM that will reset in 18 months. A year into the house, it was valued at $485,000 and we started our improvements. Currently, we owe a total of $399,000. Now, the mortgage holder says they value the house at $305,000 and we cannot refi without paying nearly $100,000 off first. (If it matters, our credit scores are just above 750.)
Our home is part of an HOA and has lost less value than the neighborhoods around us which are not part of the HOA. For example, similar homes two blocks away are being assessed by the county at $250-260K and we're at $325K.
We have good, stable income and the monthly payments are not a problem for us at all. When we bought, we were pre-approved for a $500,000 mortgage. We have never missed or even been late on a single payment.
Now what? Do we just wait and hope the value of the house comes back up enough in the next 18 months to allow us to refi out of the ARM and into a fixed? Do we take one of the other options available? If so, what option is best? I'm not necessarily trying to reduce our monthly payments (though that would be nice). I just don't want to get totally screwed in 18 month if rates go up (it is at 5 3/4 until then) and we're still unable to refi.
The details of the President's mortgage plan should be more clear on March 4. There might be something in it for you.
posted by jerseygirl at 1:08 PM on February 20, 2009
posted by jerseygirl at 1:08 PM on February 20, 2009
There's a rather long and bumpy economic road to travel before your ARM pops. You're worrying about it too much too early.
posted by SpecialK at 1:10 PM on February 20, 2009
posted by SpecialK at 1:10 PM on February 20, 2009
LIBOR is real low so check to see what it will reset to, your payments will for sure go up though because the reset will be based on a term of 23 YRS and not 30 YRS like the original loan, but the actual rate will most likely be lower than what you have currently.
posted by zeoslap at 1:26 PM on February 20, 2009
posted by zeoslap at 1:26 PM on February 20, 2009
You don't mention what part of the country you live in, but I think you're dreaming if you can even suppose that the value of your house will rise in the next 18 months. At this point, it doesn't even matter where you live very much. And to hope it will go up 33% in that time . . . well, that would have been optimistic even at the best time in the market.
The difference in house values in and out of your HOA may simply be because of what houses have sold for in both places recently and could, thus, be a simple matter of statistical "luck" which is in no way accurate. In other words, the added value you believe your HOA adds may not actually be there at all . . . which means your house may very well be worth something closer to the $250K than the $300K. (You don't provide enough information for anyone to make this kind of judgment, but if there's nothing more involved than a two-block distance and the existence of an HOA involved, I'd reckon the lower figure may be much more accurate for your house.)
In short, you may be even more underwater than you think. If you're not planning to move anytime soon, the only way this really matters is in relation to your mortgage. And, as others have said, quite a lot of things can happen in the next 18 months. Even if none of them directly benefit you, it's possible that the ARM readjustment simply won't be that bad. Everyone seems to agree that fixing the housing market is crucial to fixing the economy in general. I'd bet on continuing low interest rates more than I'd bet on anything else in this economy.
So I don't think the answer will be in finding another loan - you'd be providing only negative equity in a crappy market; I doubt you'd get a loan. And I wouldn't waste time thinking that things will turn around enough to increase the value of your house by 33% to 60% in the next 18 months. But I also wouldn't be overly worried . . . I don't think you'll get "totally screwed" in the next 18 months either. I'd probably be setting aside some extra cash to make up any difference (in a worst case scenario), which is good advice for all of us anyhow.
Just relax. You have a good credit score and payment history. You'll be among the first to take advantage of any change in the situation.
posted by Dee Xtrovert at 2:08 PM on February 20, 2009
The difference in house values in and out of your HOA may simply be because of what houses have sold for in both places recently and could, thus, be a simple matter of statistical "luck" which is in no way accurate. In other words, the added value you believe your HOA adds may not actually be there at all . . . which means your house may very well be worth something closer to the $250K than the $300K. (You don't provide enough information for anyone to make this kind of judgment, but if there's nothing more involved than a two-block distance and the existence of an HOA involved, I'd reckon the lower figure may be much more accurate for your house.)
In short, you may be even more underwater than you think. If you're not planning to move anytime soon, the only way this really matters is in relation to your mortgage. And, as others have said, quite a lot of things can happen in the next 18 months. Even if none of them directly benefit you, it's possible that the ARM readjustment simply won't be that bad. Everyone seems to agree that fixing the housing market is crucial to fixing the economy in general. I'd bet on continuing low interest rates more than I'd bet on anything else in this economy.
So I don't think the answer will be in finding another loan - you'd be providing only negative equity in a crappy market; I doubt you'd get a loan. And I wouldn't waste time thinking that things will turn around enough to increase the value of your house by 33% to 60% in the next 18 months. But I also wouldn't be overly worried . . . I don't think you'll get "totally screwed" in the next 18 months either. I'd probably be setting aside some extra cash to make up any difference (in a worst case scenario), which is good advice for all of us anyhow.
Just relax. You have a good credit score and payment history. You'll be among the first to take advantage of any change in the situation.
posted by Dee Xtrovert at 2:08 PM on February 20, 2009
I'm not entirely sure I see the problem -- while the ARM sucks, you agreed to it. Refi would be nice, but you can't go into a loan assuming that you can refinance your way out of it later.
You're not upside down until you actually sell the house (or are *forced* to refi for some unknown reason) for less than you owe on it. Right now whatever its intrinsic worth is makes no difference. You bought it at a price, you borrowed a certain amount of money to purchase the house, and now you have to pay that money back under the terms you agreed to. You have good, stable incomes and you have no problem making the monthly payment. So make it, and take your lumps.
I have great sympathy for a portion of the home-buying, mortgage-holding public who're facing foreclosure because of mistakes they made and because of predatory lending practices. I have no sympathy for people looking to tweak their loans when they are in no danger of losing their homes.
posted by incessant at 5:15 PM on February 20, 2009 [3 favorites]
You're not upside down until you actually sell the house (or are *forced* to refi for some unknown reason) for less than you owe on it. Right now whatever its intrinsic worth is makes no difference. You bought it at a price, you borrowed a certain amount of money to purchase the house, and now you have to pay that money back under the terms you agreed to. You have good, stable incomes and you have no problem making the monthly payment. So make it, and take your lumps.
I have great sympathy for a portion of the home-buying, mortgage-holding public who're facing foreclosure because of mistakes they made and because of predatory lending practices. I have no sympathy for people looking to tweak their loans when they are in no danger of losing their homes.
posted by incessant at 5:15 PM on February 20, 2009 [3 favorites]
You shouldn't feel alone. There are about 10 million others in the same situation who have an ARM, were counting on a refi, but can't because their house value has dropped.
It sounds, though, that your situation is pretty comfortable. You aren't having trouble making payments. I wouldn't worry too much about interest rates going up any time soon so your reset shouldn't be too hard to handle. You may want to start cutting back on living expenses now and saving to build up a buffer to carry you through a higher monthly payment until home prices rebound for a refi, which could take five years or more. The HELOC may be your biggest exposure since rates can change and they can even call the debt under some circumstances. It might a good idea to work hard on paying that down first.
posted by JackFlash at 8:52 PM on February 20, 2009
It sounds, though, that your situation is pretty comfortable. You aren't having trouble making payments. I wouldn't worry too much about interest rates going up any time soon so your reset shouldn't be too hard to handle. You may want to start cutting back on living expenses now and saving to build up a buffer to carry you through a higher monthly payment until home prices rebound for a refi, which could take five years or more. The HELOC may be your biggest exposure since rates can change and they can even call the debt under some circumstances. It might a good idea to work hard on paying that down first.
posted by JackFlash at 8:52 PM on February 20, 2009
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