Upside down on house-can make payments

arizonamomDecember 30, 2010

We are upside down on our house by about 80k. We can make the payments on the house, although it is tight, especially with 2 kids in college. Our credit is excellent and we don't want to 'ruin' it with a foreclosure/short sale but how can a family recover from this kind of deficit and save for retirement? Input appreciated.

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Chemocurl zn5b/6a Indiana

We can make the payments on the house, although it is tight, especially with 2 kids in college.

Well, I'm guessing that all things are the same, with the exception of the value of your home. Did you buy it with the intention of selling it anytime in the near future? If not, then you really (imho) just bit off more than you could comfortably chew when you bought that much house, with the existing mortgage.

I'd suggest getting second jobs, and the 2 kids getting employment (if they haven't already) and applying for loans and grants, thus being less of a financial burden on Mom and Dad.

Sorry if I have made wrong assumptions, or sound harsh...just the way I see it.

    Bookmark   December 30, 2010 at 6:57AM
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I understand that many people consider their house to be an investment moreso than a necessary "place to live," but your payments are the same regardless of the appraised value of the house, and you do have to live somewhere. Like when a car is bought on payments, the vehicle immediately drops in resale value when "driven off the lot" being that it's then a used car ... but that doesn't (usually, LOL) stop you from making the monthly payments because you do still need that car to get around.

Personally, I'm happy when the appraised value of my house goes down because property taxes are accordingly lower (increase in tax rates notwithstanding)!

    Bookmark   December 30, 2010 at 3:49PM
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Saving for retirement is easy, every time you have an increase put that amount of money in a 401 or IRA. That will lower the amount of taxes that you need to pay or the amount of refund received.

I agree with the other two posters in that you are looking at your house as an investment rather than a living place. Your children should be helping to pay for their college either by loans or working. Both of which can provide a record to their future employers that they are responsible except if they can not hold a job.

The only way you should worry about a short sale is if you are planning on moving for a job relocation. As long as you can afford to pay the mortgage and have not been living on the equity you should be fine. A visit to one of the free credit counseling groups in your area could probably help you reaching your goals. Time is on your side to recover the value in your home.

    Bookmark   December 30, 2010 at 10:33PM
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arizonamom, do you have to sell your home? If you do not, then the only immediate concern about being upside down on the mortgage is the effect it has on your net worth. But I think you would already know that, so I'm guessing you need to sell for some reason.

First, I'll disclaim that I am not a lawyer or financial advisor and I didn't even stay at a Holiday Inn Express last night. :-) I'm just someone in a similar position. You really should contact a local accountant and an attorney knowledgeable in short sales/foreclosures. That's not saying you will go short/foreclose, but you need to know your options.

I will guess that this is your primary residence; that makes you eligible for some remediation programs. You will need to find out who holds your mortgage now and exactly who (name and direct phone number) you can talk with about payments and loan disposition (this will require persistence). You will need to find out if they'll even talk with you unless you've missed payments (a shame, but that's the way it is with too many lenders).

A quick Web search shows me that Arizona does not consider forgiven mortgage debt as income (some states do), so if you do go short/foreclose, at least the state can't come after you for the $80K difference. The IRS won't.

But you have to know:
- whether you have other property or stuff you could sell to raise funds;
- how quickly you would need a mortgage for another place to live (or can you rent economically?);
- if you have big expenses coming up (replacing cars, required home repairs, surgery, tuition) which cannot be deferred or reduced;
- whether your kids can qualify for financial aid/work study/etc. at college (your financial condition is quite different now than it was a couple of years ago, courtesy of the house's value);
- how much you already have saved for retirement; how much you likely will need; how much longer you have to save; how likely it is both of you will maintain/increase your incomes for that long (you may be in jobs in which you're not very "portable");
- the economics of where you live -- some areas are in much worse shape than other areas; your region may just have lost a major employer or economic resource -- or may have been slipping steadily over decades.

I know I just wrote a novel :-o but if you need to sell now and you can't keep two mortgages going, you need to guess about the future as best you can.

My wife and I have been discussing this for more than a year now, and it's been tough. And while it goes against everything we were brought up to believe, these are no longer ordinary times, and our (current) thinking is that in our situation, with what we know and foresee, it may be worth getting the millstone off our neck now while we still have some wherewithal to come back from the loss. You just have to know that it will leave a big scar and not a cut artery.

    Bookmark   December 30, 2010 at 10:55PM
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That's a tough situation to be in, arizonamom. It must be emotionally difficult to keep making those payments.

Do you foresee the house regaining some of its value before you would normally want to move, say in five years or so? If so, I'd hang tight, try to enjoy living there, and try not to think about being upside down.

Who knows, foreclosure or bankruptcy could end up costing you more than $80,000 in the long run. Moving is expensive, you'd need to pay realtor commissions, etc, on a new house.

Hang in there. Hopefully the worst of the downturn is almost over.

    Bookmark   January 5, 2011 at 4:44PM
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Arizonamom, I am sorry you are in that situation. I agree with Chemocurl that nothing has changed except the value of your house.

It sounds as if you brought the house fairly recently, and either you had a drop in income, or did not expect the high cost of college. How you handle this depends on how close you are to retirement.

Can your children work or get loans to pay some of their college costs? Your retirement savings are a priority over their college tuition, etc. Can they attend a cheaper, local college? If your children are not living at home, can you take in a tenant or two? You might want to start a new post asking for suggestions on increasing your income. Since you are here, I assume you have seen all the posts on ways to save.

The goal should always be to live below your income and save toward retirement. I hope that you and your college age children find a solution that works for you.

    Bookmark   January 15, 2011 at 4:23PM
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Suze Orman has a section in her book The Money Class that talks about the percentage you are underwater. I can't remember her advice exactly, but the book is excellent. She used the example of a woman who bought a home in FL that was more than 50% underwater, and said that she should walk away. (I hope I remember this correctly.) The advice she gave to small business owners in this economy I do remember. She said "If you haven't paid yourself a dime in the last six months, close your business." I followed her advice, and it worked for me. I have talked with other small business owners in CA, and most tell me they have been in the red for the last three years. They say it's getting worse. My situation greatly improved once I faced the music.
Also, if you are losing sleep over a financial "investment", that's always a sign (to me) to sell or get out. The subconscious is very wise...

    Bookmark   March 29, 2012 at 6:15PM
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Say I bought a new car for $30k, and now it is only worth $15k - but I still have a loan on it - should I walk away? How about if I bought $30k worth of furniture that was financed, and now it is only worth $10k? How about that $50 pair of blue jeans I put on my credit card that are now only worth $5?

No matter what you buy, no matter how well you take care of it, most things usually decrease in value. Does that mean you can walk away if it was financed and you aren't finished paying it off yet? So what makes a house any different?

You agreed to buy the house, you agreed to the loan condtions, nobody forced you to do anything. Nobody ever guaranteed the house would increase in value, nobody ever guaranteed that you would continue to earn a good salary. Bottom line - the bank agreed to give you a loan, and you agreed to pay it back. Now do the right thing. For all those people who choose to be irresponsible and walk away - you are hurting the rest of us.

So you're $80k underwater? Welcome to the club. There are others who have it much worse. You have not truly lost anything until you actually sell. If you wait long enough, the market may actually come back around. In the meantime, you can increase your mortgage payments and decrease the ammount of interest you are paying on your loan. Don't have enough extra money laying around to do that? Sure you do. It's all about priorities, self-dicipline and patience. There are many "neccessities" you can cut out of your life if you are truly serious about digging yourself out of debt.

    Bookmark   April 3, 2012 at 2:04PM
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The bank provided the terms and conditions under which they would write a big check for your home. They checked on the value and stipulated in the contract what the penalty would be in the event you did not pay as agreed.

In a business class, you would analyze the scenario and see what would be better, maintains the terms of the contract and pay as agreed or take the penalty as the bank laid out in the contract.

Nowhere in a business class would they factor in an argument of, you are a bad person because you took the penalty.

They wouldn't tell you to take out additional debt to avoid the penalty.

You would just do a cost benefit analysis on the terms as opposed to the penalty.

If you select pay as agree, take on additional debt and reduce your net worth, operating in the red, you would likely fail the course.

The banks and any other business look at it the same way.

Those same banks are trying to rally the morality argument because we as a culture are very moral and want to do the right thing. That said, there is nothing immoral or wrong with taking the penalty on any contract.

If the value had gone up and you couldn't pay, would they hesitate to take your house?

    Bookmark   May 7, 2012 at 12:46PM
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Those same banks are trying to rally the morality argument because we as a culture are very moral and want to do the right thing. That said, there is nothing immoral or wrong with taking the penalty on any contract.

Morality is a personal issue, I do not derive my moral belief from a bank or any business.

    Bookmark   May 7, 2012 at 1:24PM
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Maybe that is why we see so many corrupt businesses. There is an argument for morality in good business. (TRUST).

Find a better business school.

    Bookmark   May 8, 2012 at 9:20PM
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Difference is that a corporation faces different rules after defaulting on a loan. A smart business owner will incorporate, and then after a default, will reorganize. For an ordinary person. a default or foreclosure or a short sale will ***seriously*** impact the person's credit rating, making getting a new loan nearly impossible for a number of years.

    Bookmark   May 8, 2012 at 10:53PM
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Totally agree, the individual will face consequences usually greater than a corporation. That is one reason why I find the double standard laughable. If a homeowner is willing to take the credit hit, there is no reason why I feel compelled to judge them. They have their own cost/benefit to address, just like a business. At the end of the day the worst thing that happens to a business is that it ends. If people don't look at their family situations as a business would, unfortunately there can run themselves into homelessness over this double standard.

I know a lady who's husband was laid off, so they are going through her retirement to make mortgage payments on an underwater home. What's going to happen when she can't work? No more retirement, they don't have kids......they are pre social security age, but old enough to have a really hard time getting hired.

Sorry, in her case I would take the penalty as laid out In the contract written by the bank.

    Bookmark   May 9, 2012 at 12:04AM
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Every business, incorporated or not is run by individual people.
Each individual person has to answer for their own personal moral decisions.

I see a difference between what is legal what is moral.
Each person must make their own moral decision, people have different moral values so it is difficult to dictate to others what is moral.

In my opinion (and others,) laws dictate what is legal (or illegal)but not what is moral.

    Bookmark   May 9, 2012 at 10:30AM
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Today's article:
""If you can afford to make your monthly payment and are choosing not to, you will not get this principal modification," says Sturzenegger."

See the link for the modification letters going out.

Here is a link that might be useful: BofA article on mortgage modification offers

    Bookmark   May 9, 2012 at 10:36AM
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I think the subject of the message can be 'Entitlement'

Let me ask the inverse question? If you bought your home and it triple in value & mortgage rates skyrocketed - Would you call the bank and say I'm paying too little for this unit and wnat my mortgage rates increase because my kids have finished college?

A home (as an investment) is a gamble and unfortunately you are on the losing end at the moment but too many people are crying victim but when they were ahead (they weren't complaining or seeking equitable treatment)?

Pay your mortgage and hold to the agreement you established at one point. The bank didn't tell you to have kids or send them to college - they said we will loan you x amount based on your agreement to pay us back over ## years.

    Bookmark   May 23, 2012 at 12:21PM
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I used to think morality mattered in situations like this, but I'm not sure if I feel that way anymore. I sold a house to young immigrants from Poland once, and their free-wheeling/creative aggression when it came to questioning financial rules was eye-opening. Afterwards I wondered if it was because they grew up with a less controlled economic system than ours. Capitalism is inherently ruthless at the macro level. Why should it suddenly grow a conscience at the micro level?

Smart investing require making smart business decisions. Which path makes the most sense financially for your family, long term? Crunch the numbers, make a decision, and then live with it.

Personally, if I were in this situation my first responsibility would be to protect my household's financial strength, no matter what it took.

    Bookmark   January 13, 2013 at 2:06PM
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Can you refinance to lower your payments? Or consider having your kids start paying for their own college education, or part of it? Don't put yourself out of your home over your kids education. I know student loans suck, but you have to be realistic.

    Bookmark   March 25, 2013 at 9:36PM
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They cannot refinance if they are $80k underwater - that's usually the big problem. There are some special programs, if they qualify.

It is a wonderful gift to be able to give your kids a higher education without them having to incur debt - but only if they appreciate the gift and use it wisely (ie do not get into credit card debt anyway by spending money excessively).

OP, assuming you do not have to sell your house now, I would ride it out and try not to think about the "theoretical" value of your home. That's all it is until you sell it - theoretical value. In a year or 2, I am sure things will look better for you. The housing market is back on the rise again, it will just take longer in some places than in others.

    Bookmark   March 26, 2013 at 10:09PM
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Do you guys realize the OP was from 2010?

"In a year or 2" already passed....

    Bookmark   March 26, 2013 at 10:14PM
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When we bought our first home we thought of it as our home and we bought below what we could afford to be secure. Our last two homes we bought what we could afford. I thought of them as an investment and our home. If I should ever run out of money I can sell this home, buy a cheaper one and have money, or take in a boarder. Probably a boarder, I love my home.

    Bookmark   March 27, 2013 at 6:21PM
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No - I didn't check the date, sorry. Someone resurrected the discussion!

    Bookmark   April 1, 2013 at 9:37PM
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Resurrected or not, anyone opening this thread to read it might be interested to know that the HARP mortgage program has been extended. HARP is for people whose mortgage is underwater and who could not otherwise refinance and take advantage of the low mortgage rates. Ask your current mortgage company if you are eligible for a HARP mortgage. You have to use the house as your primary residence. You can have a second mortgage or a HELOC on the house, too, but the second mortgage lender has to sign that their mortgage is subordinate to the first mortgage. We lowered our mortgage rate and our new payment is $300 less per month.

Thank you, President Obama, for continuing a program that was scheduled to expire.

Here is a link that might be useful: HARP site

    Bookmark   June 11, 2013 at 6:08PM
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And, a year or 2 later, now, they may no longer be underwater. In my area, things have much improved.

    Bookmark   June 17, 2013 at 11:35PM
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