Underwater and selling: prepay mortgage or save for closing?

September 2, 2010 12:01 PM

My wife and I are planning on selling our home early next year. We are currently owe about 10-15k more than it is worth. When we sell, we may have to pay up to 20k to cover the remaining balance on our mortgage, which we will have at that time. Instead of saving the money to pay when we close, should we instead pay down our mortgage so we will be above water when we sell?
posted by bajema to Work & Money (8 answers total)

Purely as a homeowner responsible for the family's finances, I would be inclined to save the money to pay at the closing, as a way of keeping the money available if needed for other purposes. If the house fails to sell in a timely way, paying the mortgage down means you just have more money locked up in a place where you can't get to it. If you're aswim in liquid assets anyway that might change the equation, but I'd probably opt to hold onto the extra savings in a way that would let me use it potentially for multiple purposes in the event of something unpredictable happening.

The exception: sometimes I will choose to do something analogous to you paying down the mortgage as a way of locking the savings away, if I fear we'll piss it away otherwise. This relates to you knowing your own psychology--if you are a person who can put the money in savings and honestly not touch it except in the direst emergency so that it is actually available when you close on your house sale, good. If you're the kind of person who is at risk of over-spending for non-emergency purposes and leaving yourself short when it matters, you might be better off locking it up in the house.
posted by not that girl at 12:07 PM on September 2, 2010

Also: I have a friend who was able to force the bank to accept a short sale on her old home by not paying the payments after she moved out. If there is any chance you'd like to consider a route like that, money locked up in the house may be money that you would never have to pay at all if the bank will eventually accept a short sale. (I say nothing about the ethics of this route, which some people have strong feelings about.)
posted by not that girl at 12:09 PM on September 2, 2010

I agree with ntg in that I would remain liquid which preserves your options. I also think there are ways to negotiate with the bank to accept less than the full mortgage without hurting your credit going forward although that involves your bank being willing to negotiate and cooperate.
posted by JohnnyGunn at 12:44 PM on September 2, 2010

You ideally want to do a short sale, and negotiate a deed in lieu of foreclosure. More on short sales.
posted by artlung at 1:23 PM on September 2, 2010

I recently set up a line of credit to pay down the mortgage by the maximum balloon payment possible the week before the mortgage closed. When we closed out, I paid off the LOC. When is your mortgage anniversary date? I actually did two balloon payments. Once for the max amount on the payment PRIOR to the anniversary date and one for the next payment. Then we closed out the day after that. It cost $75 in interest, but saved me $5k+.
posted by acoutu at 2:30 PM on September 2, 2010

There are a couple of factors I would look at before even deciding which way to go. First, how certain are you that you will be selling the house early next year? Do other factors in your life make it inevitable that you will put the house up for sale then? Next, how certain are you that it will sell immediately? The last time I sold a house it took five days. Today it might take up to six months. Your own need to sell may well affect the actual price you get for the house. How comfortable are you with predicting the housing market six months from now? Can you be certain that the house will sell for your estimated $15k below the pay-off amount? If you can solidly and definitively answer these questions and you are dead certain that are going to sell the house under the assumed conditions, then by all means make the pay-down now. Where else can you invest your funds for a return equal to the interest rate you are paying? And, as mentioned above, look out for pre-payment penalties and loan anniversaries.

ON THE OTHER HAND, if you cannot answer all of the above questions with certainty (and I know I can't) you should probably hang on to the cash until and if there is a closing.
posted by Old Geezer at 3:08 PM on September 2, 2010

The stimulus package is going to run out soon. If I was thinking about selling a house, I would be thinking about what that's going to mean for the economy, and probably trying to sell sooner than 2011.
posted by Coventry at 7:40 PM on September 2, 2010

If it's possible with your mortgage, can you have it in an offset account? This way it is accessible but it saves you interest. This depends of course on whether your interest rate is such that the interest you save outweighs the interest you'd earn if it was in a savings account (and don't forget to factor in taxes etc).
posted by Lucie at 1:28 AM on September 20, 2010