Should I stay or should I go now?

July 7, 2010 11:51 AM

Housing woes, what should I do?

In 2003, I bought a house in Maryland with a loan for $230,000.
This is a smallish townhouse. I have a 30 year fixed rate mortgage and my monthly payment is about $1,615 (that includes an escrow for almost $300 a month in property taxes.) I still owe $213,000.

Water for 3 months costs about $110, electric averages about $100 a month.

Similar homes to mine are now renting for $1,200 to $1,500 in the area.
In the really bad parts of town, homes like mine are selling for about $115,000 - $135,000. A townhouse literally across the street from me sold for $155,000 a month ago.

I have been looking to move for a long time now. MD is a recourse state so I can't just walk away, even if I wanted to ruin my credit.

What would you do if you were in this position? I savings and liquid assets ($100,000) - I make about 58,000 reliably a year.

My only realistic thoughts so far have been to:
1. Keep paying the mortgage and try to quit stressing out all the time.
2. Walk away and hope I don't get sued for the remaining balance.
3. Try to rent out this place for about $1,200.
Then I could buy\rent something else and get a new mortgage for around 130,000 or $700 a month payment.
I then started thinking about that more though and with only $500 a month savings before whatever the costs of the new property tax\income taxes from renting are it might not be worth it especially if I need to continue paying the water\electric\HOA fees ($60 a month) for the rental property.

Basically, I just feel very stuck and I'm not sure what to do. This has been torturing me for awhile and I need to get some outside opinions. I thought back then (at 19 years old) that I'd be able to sell the place after a few years for around the same price I got it at (I bought before the very top of the bubble in this area, I could have sold it for almost 260,000 at one point which is insane.)

Thanks so much for reading everything.

posted by anonymous to work & money (15 answers total)

I'm not sure what you should do with your house and your desire to move, but it might help to clarify a few things:

Similar homes to mine are now renting for $1,200 to $1,500 in the area.
Why does your option#3 assume that you'll only be able to rent at the bottom of that range?

In the really bad parts of town, homes like mine are selling for about $115,000 - $135,000.
This is irrelevant unless your house is also in a really bad part of town.

A townhouse literally across the street from me sold for $155,000 a month ago.
Is your house of a similar size and in similar condition, with similar curb appeal?

Finally, where do you hope to move to?
posted by jon1270 at 12:05 PM on July 7, 2010

Are you looking at your townhouse as somewhere to live, or some sort of investment? I have a feeling it may be the latter. It may help to think of it as your shelter, rather than something that is allegedly supposed to make you money.
posted by kellyblah at 12:15 PM on July 7, 2010

anonymous: Then I could buy\rent something else and get a new mortgage for around 130,000 or $700 a month payment.

This is highly unlikely. You've already got a $200k mortgage, which seems reasonably in line with your current income. Unless there's some change in the mortgage market I missed, a bank is not going to extend you a second $130k mortgage based on planned rental income from an already-leveraged property; this is essentially robbing Peter to pay Paul.

Side consideration: Rental income is taxable. You won't see all of it.

If you can afford to pay your mortgage without dipping into your savings, I'd advise option 1. Remember: the house you bought is the same as the house you live in now, the only change is in perceived value; if you're not selling it, it doesn't matter.
posted by mkultra at 12:22 PM on July 7, 2010 [1 favorite]

If the payments are stressing you out to the point of distraction, my recommendation would be to rent it out -- but like jon1270 said, don't assume/settle for renting it at the bottom of the price range.

There are things you can do to increase the attractiveness of your rental. Furnished apartments will rent for more than unfurnished ones and are especially attractive to people looking to move in from out of town (and therefore willing to pay more for the convenience of not having to go furniture shopping).

I know you probably don't want to think about spending any more money right now, but investing in some upgraded furniture and interior/exterior cosmetics can pay dividends down the road. Also, including utilities can serve as an incentive.

Aggressively marketing your rental is also key -- multiple Craigslist postings (I know they annoy everyone else, but they work!), local papers, any local websites, etc. And don't settle! If you are offering a nicely furnished townhouse, perhaps +/- some utilities, and are patient, it is not unreasonable that you could rent it for the $1,615 you pay a month.

Good luck.
posted by adamdrici at 12:30 PM on July 7, 2010

Well, you've always been paying about 50% of your take-home pay to the bank for your mortgage, right? (That's steep!) And now you're worried about being underwater in your loan, right?

1. Contact your lender for a streamlined refi. Yes, you'll get into another 30-year loan, but your payment will be lower as will your interest rate. (This is the best option for people who have been paying on time and whose only issue is they are underwater.) Be warned that it may take several months to close. I started one of these refis back in December and closed at the end of March.

2. Take in a roommate. Start by charging 1/2 the market rate for rent in your area. When you do get a roommate, do it legitimately--have a written lease and know your rights/responsibilities as a landlord.

3. In lieu of getting a roommate, you can probably make $500 month if you start delivering pizzas or waiting tables or mowing lawns or babysitting--doing something on the weekends and during your free time. You can throw that extra money at the mortgage, without dipping into your savings. If it really bothers you.

Just some ideas.
posted by FergieBelle at 12:36 PM on July 7, 2010

From the OP:

Why does your option#3 assume that you'll only be able to rent at the bottom of that range?
-My next door neighbor has a house near identical size and condition. He rents it for about 1,200 a month.

Is your house of a similar size and in similar condition, with similar curb appeal?
-Yes

Finally, where do you hope to move to?
-Wyoming or Montana. My job just requires a high-speed internet connection so anywhere is really an option.

Are you looking at your townhouse as somewhere to live, or some sort of investment?
-I'm looking at it like a very expensive boat anchor. I really want to move and in addition to that, I'm not happy with what I'm paying anymore. I didn't buy it thinking of it as an investment but I also didn't buy it thinking I'd be underwater and stuck in a few years. I've changed quite a bit in 7 years and this place just isn't as much of a home as it used to be.

posted by jessamyn at 12:39 PM on July 7, 2010

Which part of Maryland do you live in? Baltimore area? DC metro area? Or elsewhere?
posted by anniecat at 12:54 PM on July 7, 2010

You really don't give enough information here:

Have you gotten an appraisal?
What interest rate do you have for your 30 year fixed?

What are you looking to do? You say you can work anywhere, but are you worried about your job? About your money situation? Or are you just looking to get out of the loan?

Why don't you re-fi as an interest only loan and rent it out. You could, hopefully, rent it out for more than the interest and then anything extra put toward the principal. That would give you a break on the amount so you wouldn't be losing any every month ($1600 seems really high, even with an escrow of $300).
posted by TheBones at 1:07 PM on July 7, 2010

Rental income is taxable. You won't see all of it.

Income, however, is revenue (rent) minus expenses, which would include depreciation, mortgage interest, insurance, and property taxes, plus of course improvements and maintenance. Given the OP's situation, it seems likely that there wouldn't be much if any taxable income on the property until rents come up pretty substantially. Until that happens, you can deduct your rental losses against your income from other sources, such as your primary job. It is entirely possible that, even with losses, getting a new house and renting out the old one will give you a lower total payment. By putting more down, you can reduce your payments even further.
posted by kindall at 1:09 PM on July 7, 2010

Are you looking at your townhouse as somewhere to live, or some sort of investment?
-I'm looking at it like a very expensive boat anchor. I really want to move and in addition to that, I'm not happy with what I'm paying anymore. I didn't buy it thinking of it as an investment but I also didn't buy it thinking I'd be underwater and stuck in a few years. I've changed quite a bit in 7 years and this place just isn't as much of a home as it used to be.

Well if that's how you feel, why would you want to get another mortgage and have another anchor? IF you really want to move now, why not rent out your place and rent an apartment for yourself to live in? Or better yet, keep living in your house and simply travel? It sounds like you could reasonably work on the road.
posted by WeekendJen at 1:51 PM on July 7, 2010

Well a painful option is to sell it for what it is worth (let say the 155k). You say you have 100k in assets. Well you could bring 55k to closing and walk away clean (if bloody), and start your new life. Maybe not the most palatable but if you want out if would be the fastest, cleanest way. Or talk to your lender about a short sale maybe? or even deed in leiu of foreclosure might work. Your assets give you some negotiating strength, and while it is an expensive lesson in real estate investing it also sounds like a a non ruinous (albeit paniful) way out-if freedom is what you want most.
posted by bartonlong at 1:59 PM on July 7, 2010

If you have a second bedroom, I would get a roommate to make some extra money.
posted by ishotjr at 3:53 PM on July 7, 2010

Look at it this way:

You currently pay $1,615 for housing.

You can rent out your house for - worst case scenario - $1200 a month and move to Wyoming, renting out a new condo for $600 a month, for a total outgoing of $1800.

You can sit out the recession wherever you want to be, and wait to sell your house until property prices recover. That plan puts you $200 a month down on where you are now, assuming you don't refi at a better rate.

Would you happily pay $200 a month to be happier?

I would.
posted by DarlingBri at 4:15 PM on July 7, 2010

kindall: Income, however, is revenue (rent) minus expenses, which would include depreciation, mortgage interest, insurance, and property taxes, plus of course improvements and maintenance.

Any deductions based on depreciation, mortgage interest, insurance, and taxes should already be claimed by the OP, as they are not unique to leasing a property. There is no additional savings there. Expenses related to improvements and maintenance are deductible, but you've still spent the money.
posted by mkultra at 9:08 AM on July 8, 2010

Any deductions based on depreciation, mortgage interest, insurance, and taxes should already be claimed by the OP, as they are not unique to leasing a property

If you are living in the house, the mortgage interest deduction only helps you to the extent that it exceeds your standard deduction -- $11,400 a year for a married couple. That puts quite a dent in your mortgage interest deduction. If you are leasing it out, you can deduct all your mortgage interest. It comes right off the bottom line (Schedule E) and your losses can be used to offset other income.

I am not a tax accountant. Run this by your friendly neighborhood CPA before relying on it..

In any case, "rental income is taxable, you won't see all of it" was my objection.
posted by kindall at 8:39 PM on July 8, 2010