- $410k home bought on 10/05
- 80/15/5 loan
- 80% 5/1 ARM @ 5.375% [$315k remaining]
- 15% 15yr fixed @ 7.5% [$50k remaining]
- 5% Down payment
- The House next door (identical, since we live in a townhouse) has been on the market at 290k for 1 month.
Unfortunately, we bought our house at a bad time, and we are now upside down. We can afford our mortgage, and I am currently paying down the 15yr fixed down as quickly as possible (an extra $600/mo). However, I'm afraid that when the 5yr ARM is up, we'll be unable to refinance the mortgage since we are upside down by so much.
The main concern here is the ability to refinance when the 5/1 ARM resets. As of today, I'm willing to toss up to 30k of savings into the 15yr fixed to try and get it paid off before the 5/1 ARM resets. With this aggressive strategy (30k down and an extra $600/mo) I'll have the 15yr fixed paid off in two years. At that point, the 5/1 ARM should be at $300k and hopefully the market has shifted such that I'd be able to refi.
My question is this: 'Am I better off paying down the 5/1 or the 15yr?' When refinancing, I believe they look at all the liens on the house, not just the loan in question. Thus, since the 15yr has a higher interest rate, I'm better off paying down that one.
Kudos for actually taking your medicine and paying as agreed.
My recommendation would be to pay down the loan with the highest interest rate, as any subsequent lender in a refinance will, as you state, look at the outstanding amount owed and consider making a load based on a loan to value analysis using an appraised value.
Example: If you pay off the 15-yr fixed then you would owe about $300K+ on a home worth (hopefully) $300K+. When the arm resets you can hopefully find another 100% refinance. If you had paid down the 5/1 ARM by the same amount you'd be in the same spot, except you would have paid more interest in the mean time on the 15-yr fixed.
Be cautious about putting all your savings into the second loan. Make sure you save enough for the emergency savings. You don't want to put yourself into a situation where you get the rate reset, a financial crisis (god forbid) AND no savings.
Are you sure you are upsidedown by as much as your neighbor's house would seem to suggest? I did not think housing prices had dropped by that much anywhere. Hopefully you'll be able to refinance whatever is left before the reset. Check those credit reports to make sure they are clean. Consider writing a letter to your lender and asking if they will replace the loan with a fixed 30 year at a more competitive rate. Can't hurt to ask and you might get a favorable response....
Don't give any more money than you must to your current lenders to stay current. When refinance time comes around, the 50k in your pocket will encourage the new (or old) lender to deal with you, even if the collateral does not cover the entire loan amount.
This way, you will also be in a position to benefit from any national 'principal forgiveness' or 'refi' deals; or walk away with 50k in your pocket as a last resort.
Play your cards (in this case, your 50k) close to your chest.
bobes
Senior Member
posted: Mar. 10, 2008 @ 11:16a
lindylady said: One question. When does the arm reset?
I'm guess right around 10/2010 since the home was bought in 10/05
brown1978
Ancient Member
posted: Mar. 10, 2008 @ 11:18a
Where do you live? The way things are going your house could be worth $250k by the end of the year if the house next door is already at $290k. I would keep my money in the bank as everything you put in it will be lost and let the government save me.
Unfortunately, Eric has a point. The trend here is to punish responsibility and reward irresponsibility.
OTOH, if "voluntary writedowns" are the solution, the 2nd is not going to be eager to write their balance down to zero.
DealWinners
Senior Member
posted: Mar. 10, 2008 @ 11:20a
DavidScubadiver said: Are you sure you are upsidedown by as much as your neighbor's house would seem to suggest? I did not think housing prices had dropped by that much anywhere. Hopefully you'll be able to refinance whatever is left before the reset. Check those credit reports to make sure they are clean. Consider writing a letter to your lender and asking if they will replace the loan with a fixed 30 year at a more competitive rate. Can't hurt to ask and you might get a favorable response....It depends on the area. Mine is almost the same as OP's (20% - 40% down).
bobes said: lindylady said: One question. When does the arm reset?
I'm guess right around 10/2010 since the home was bought in 10/05 I've heard of both 3 and 5 year arms and my advice is different if 2008 then 2010. By 2010 prices could have changed a lot more either up or down.
i think you should talk to your lender before you decide to pay the loan . Please wait for some time and see all available options .
LisaS
Tired Member
posted: Mar. 10, 2008 @ 11:47a
lindylady said: bobes said: lindylady said: One question. When does the arm reset?
I'm guess right around 10/2010 since the home was bought in 10/05 I've heard of both 3 and 5 year arms and my advice is different if 2008 then 2010. By 2010 prices could have changed a lot more either up or down.
pringle said: Here's my situation:
- $410k home bought on 10/05
- 80/15/5 loan
- 80% 5/1 ARM @ 5.375% [$315k remaining]
- 15% 15yr fixed @ 7.5% [$50k remaining]
- 5% Down payment
- The House next door has been on the market at 290k for 1 month.
I think it's a 5 year arm.
That being said I think you're doing the right thing here OP. You're better off paying down the higher rate (15 year) loan. But gatzdon is right on the mark about having some liquid savings for an emergency fund. You don't mention your liquid assets - I'm running under the assumption that you're not draining your savings, in which case, yes, take 30K and pay off the 15 year with higher payments.
Wow, really tough situation. First I wish you the best of luck. My problem with this and I know two people going through the same thing is that your house will "probably" never be an asset - as long as you own it. It its worth $275k and you paid $410k, then you are upside down $135k. If we bottom out in a few years and your house bottoms at $275k and returns to normal appreciation (depending on area) lets say that's 4% annual. I don't have a financial calculator, but at that rate you probably be lucky to break even in 50 years. So you would end up paying several hundred thousand dollars for a house that is worth $400k in thirty years. I think that means 30 years of PMI too. There is obviously a lot of speculation here, but according to the average returns on real estate, you are screwing yourself I think. Maybe short sale and a happy retirement? If this were me, I would risk my future on a building.
Many people wouldn't like this but this is a perfect opportunity to walk away from the house. You are already down 120k (410-290) and considering the 6% commissions, you are down even more. Stop making payments for 2 months and see if the lender renegotiates your loan to an affordable fixed rate mortgage. If bank doesn't care, then your options are to either walk away or pay back the past due payments. As EricGo said, you are better off holding the 50K in your pocket than giving it to the bank. The bank has a greater incentive to negotiate the loan if they are facing a greater loss. If you pay them 50K, they dont have as much motivation to negotiate. But be prepared to see your credit scores trashed in this process. It all depends on if you value your credit score more or your house.
I wouldn't sweat your situation to much. As others have said pay down the 2nd lien the quickest. Don't drain your savings before you have to.
I'm assuming you have a standard 5/1 arm. Given that the 1 yr libor index is at 2.75 (about) your first reset will be your margin (standard conforming is 2.25%) plus the libor index 2.75 = 5.00% - pretty shocking hey? Of course your arm will reset in 2010 and today's rates really aren't applicable. Most conforming arms only allow a 2% adjustment upwards for the first reset so your max rate will be 7.375 or less and your loan will have a lifetime cap of 10.375.
So why do I mention that? While a resetting rate might sound bad, in this case if it were to reset today it would be beneficial to you. I'm not saying gamble on where rates maybe 2.5 yrs from now but the reset might not be so bad when it does happen. Just keep an eye on the 1 yr libor.
If you can get the 2nd lien paid off you'll have a pretty good shot at doing a rate & term refi at 100% financing in 2 yrs (worse case) however be advised mortgage insurers want at least a midscore between both borrowers of 680.
Don't focus to much on the neighbors sale price, there are a million factors that could be at work there.
Walking away (Jingle mail) is an option if you have carefully considered the negative consequences of the credit hit you would take. (jobs, financing cars, future homes, leasing apartments etc.) Can u deal with an all cash lifestyle ? I know I can, so I know what I would do in your situation.
While by law with the Bankruptcy reform act of 2005 a BK cannot be used or factored against you for future employment a Foreclosure can be.
OP could also pay 300-400 and have an appraisal done to gauge fair value and then decide on market data and not just the home next door.
jidteach
Broke Member
posted: Mar. 10, 2008 @ 12:45p
DealWinners said: DavidScubadiver said: Are you sure you are upsidedown by as much as your neighbor's house would seem to suggest? I did not think housing prices had dropped by that much anywhere. ....It depends on the area. Mine is almost the same as OP's (20% - 40% down).The house next door to me sold for $399K in 2006, the house next to it sold recently for $265K, which is exactly what we paid in mid 2004. What a clusterf#$%. Good luck, OP, and hold on for dear life - wish I had some better advice.
wow, I cannot belive theres FWF members that are actually advises someone to not pay what they owe.
what happened to the 'pay up deadbeat comments?' I know that they dont apply to the OP becuase he wants to do the right thing. But the fact that people here are actually talking about short sales, walking away, hinting at foreclosuer. etc. WOW.
I'll hope if you are giving that advice you never tell someone to 'pay your bills deadbeat'.
Assumptions: A. You seem to be a good saver. B. I assume you are married.
1. Do everything to keep your AND YOUR wife's credit score as high as possible. MONiTOR AND CLEAN.
1b. Make sure your wife is NOW developing some small yet quality business CCS. (I would recommend Advanta, Home Depot , Dell, etc)
2. Keep the money ($50K) in the bank. Do NOT use it to pay the 2nd down.
3. YOU (and NOT the wife) get 100K in 0% BT offers. Only the biggies (BOA CHASE CITI USBANK). Keep utilization down
3a. Use $50 K to pay off the 7.5%
3b Do not use the Citi BT (12 month 0% after 1st BT which has to be done in 12 months) and keep the rest alive and available in case of a 0% BT mistake.
4. Send that extra $600 AND ANY SAVINGS to the 0% BT CCS.
5. In 10 months PAY off all your credit cards and have wife do a SMALL BUSINESS AOR credit cards. Again, keep some cards open and available in case of error. (Tag Team AOR with a safety net)
6. In 20 months you do the BUSINESS AOR and wipe wifey's CCS clean.
RESULT: In 10/2010 you should owe $16K - 25K less on that balance - which is ALL on business credit cards. (A 25k line is a pitance for someone who could be approved for a $400K home loan) Remember you ARE NOT contributing to savings - you already have $50K in the bank.
You are not paying any of that 7.5% interest on the second loan.
Your credit should be great.
Dureing the entire process you had extra UNUSED 0% Bt offers in case of error/mistake.
You should have no problem qualifying for a new home loan in the 2010 world of foreclosures, defaults, missed and late payments. It is going to be a nightmare for sure !!!
BUT --- You will be looking pretty with spectactular credit, only a $315K home loan, a little ($25K) business credit card debt), REAL money in the bank.
You deserve Kudos for facing this reality. 10-18 months of EXTREME savings - no vacations , no eating out, bringing your lunch to work and use of 0% BT offers will save your family.
michal1980 said: wow, I cannot belive theres FWF members that are actually advises someone to not pay what they owe.
what happened to the 'pay up deadbeat comments?' I know that they dont apply to the OP becuase he wants to do the right thing. But the fact that people here are actually talking about short sales, walking away, hinting at foreclosuer. etc. WOW.
I'll hope if you are giving that advice you never tell someone to 'pay your bills deadbeat'.
But most FWF members want housing prices to return to a more normal level. Many also want housing prices to crash so they can buy up good properties at very attractive prices. Buyers walking away makes prices go down.
vrb747 said: Walking away (Jingle mail) is an option if you have carefully considered the negative consequences of the credit hit you would take. (jobs, financing cars, future homes, leasing apartments etc.)
In addition to the credit hit, he's also walking away from the $45K he's sunk into the house so far. Granted, there is the appearance that the $45K is already gone, but when the house starts to appreciate in value again (and it will, eventually) he'll get that $45K back plus more. If he walks away now there's no way to get that $45K back.
swandown said: vrb747 said: Walking away (Jingle mail) is an option if you have carefully considered the negative consequences of the credit hit you would take. (jobs, financing cars, future homes, leasing apartments etc.)
In addition to the credit hit, he's also walking away from the $45K he's sunk into the house so far. Granted, there is the appearance that the $45K is already gone, but when the house starts to appreciate in value again (and it will, eventually) he'll get that $45K back plus more. If he walks away now there's no way to get that $45K back.
how? even if the market turned around today. And housing grew at 3% a year it would take ~9 years to get back to 415k, and thats if the house is worth 315k today?
given that before it starts going up, it will be flat for a while, that could easily be 10+ years out before he brakes even.
That being said. if he can get the rates locked down before inflation really kicks in (which my thoughts are, is that its way bigger then being reported, and will for now get worse). The mortage will be cheaper over time, since the dollars using to pay for it, will be worthless then before.
- $410k home bought on 10/05
- 80/15/5 loan
- 80% 5/1 ARM @ 5.375% [$315k remaining]
- 15% 15yr fixed @ 7.5% [$50k remaining]
- 5% Down payment
- The House next door has been on the market at 290k for 1 month.
Unfortunately, we bought our house at a bad time, and we are now upside down. ...... ...
OP, I don't know what to suggest since it is a tough situation, except for you to carefully look at your home price assumptions, for both the current market and 2010.
For the current market, you should check if your neighbor's house is a true comparable. Nationally the average home price had declined almost 12% in 2007. On the state level the bottom 4 states (CA, AZ, NV and FL) average 25% decline. However, the national average HPA for the last 5 years is still (annualized) positive 5-6%. The numbers you cited are at the lower end of the spectrum.
For 2010 the current expectation from economists is another 15% of price decline nationally. YOu should build some further price decline in your analysis.
daregan
Ancient Member
posted: Mar. 10, 2008 @ 4:29p
michal1980 said: wow, I cannot belive theres FWF members that are actually advises someone to not pay what they owe.
what happened to the 'pay up deadbeat comments?' I know that they dont apply to the OP becuase he wants to do the right thing. But the fact that people here are actually talking about short sales, walking away, hinting at foreclosuer. etc. WOW.
I'll hope if you are giving that advice you never tell someone to 'pay your bills deadbeat'.Because this is fatwallet FINANCE, not fatwallet CONSCIENCE.
NorthStar2020 said: Many people wouldn't like this but this is a perfect opportunity to walk away from the house. You are already down 120k (410-290) and considering the 6% commissions, you are down even more...
What!? OP said that the house next door has been up for sale for 290k for just 1 month. This is the beginning of the totally irrelevant information in the story problem, intended to confuse and befuddle the math student. Obviously, the ploy worked on NorthStar. The asking price of the house next door means nothing. Maybe the house next door is 800 square feet, needs a new roof, siding, windows, wiring, plumbing, well, basement, septic, etc.
Correct advise to the OP: take a chill pill. You have no clue of the current value of your house. If you are that freaked out, call a RE agent and tell them you're considering putting your house on the market. Have them come out and do a walk-through and advise you on an asking price. Then you'll have some basis for knowing whether or not to freak out.
Would you agree to tuck your tail between your legs and walk away if OP says the next door house is identical to his?
ScrawneyWallet said: NorthStar2020 said: Many people wouldn't like this but this is a perfect opportunity to walk away from the house. You are already down 120k (410-290) and considering the 6% commissions, you are down even more...
What!? OP said that the house next door has been up for sale for 290k for just 1 month. This is the beginning of the totally irrelevant information in the story problem, intended to confuse and befuddle the math student. Obviously, the ploy worked on NorthStar. The asking price of the house next door means nothing. Maybe the house next door is 800 square feet, needs a new roof, siding, windows, wiring, plumbing, well, basement, septic, etc.
Correct advise to the OP: take a chill pill. You have no clue of the current value of your house. If you are that freaked out, call a RE agent and tell them you're considering putting your house on the market. Have them come out and do a walk-through and advise you on an asking price. Then you'll have some basis for knowing whether or not to freak out.
NorthStar2020 said: Would you agree to tuck your tail between your legs and walk away if OP says the next door house is identical to his?
Yep.
Rathipon
Greedy Member
posted: Mar. 10, 2008 @ 10:45p
michal1980 said: wow, I cannot belive theres FWF members that are actually advises someone to not pay what they owe.
what happened to the 'pay up deadbeat comments?' I know that they dont apply to the OP becuase he wants to do the right thing. But the fact that people here are actually talking about short sales, walking away, hinting at foreclosuer. etc. WOW.
I'll hope if you are giving that advice you never tell someone to 'pay your bills deadbeat'.
If OP wanted morality advice he would be at a different forum. Negotiating with lenders, short sales, and walking away are perfectly legitimate options for underwater homeowners from a financial and legal perspective.
Rathipon said: michal1980 said: wow, I cannot belive theres FWF members that are actually advises someone to not pay what they owe.
what happened to the 'pay up deadbeat comments?' I know that they dont apply to the OP becuase he wants to do the right thing. But the fact that people here are actually talking about short sales, walking away, hinting at foreclosuer. etc. WOW.
I'll hope if you are giving that advice you never tell someone to 'pay your bills deadbeat'.
If OP wanted morality advice he would be at a different forum. Negotiating with lenders, short sales, and walking away are perfectly legitimate options for underwater homeowners from a financial and legal perspective.
and thats different then not paying you bills?
and since when is FWF not about morality? been here long enough? come on now, if he was trying to get away with not paying a bill, 1/2 this place would hang him... But since the market turned sour its ok now to pay less?
When the market was going up, should the lender come back and tell the homeowner, I know the loan we gave you was for 400k, but the house is now really worth 800k, and we just doubled your loan?
Rathipon
Greedy Member
posted: Mar. 10, 2008 @ 11:23p
The lender and OP agreed to enter into a business relationship. Money was loaned to OP, and Lender took a security interest in OP's house to ensure return of its capital. Lender made a poor business decision by not taking sufficient collateral and it is well with OP's legal rights, and in fact probably adviseable from a purely financial perspective, for him to take advantage of lender's poor business decision and walk away.
People can inject morality into the debate all they want, and they often do. However, if OP wants financial advice, then walking away probably makes a whole lot of sense. Furthermore, even if you take morality into account its certainly debatable whether in fact it is even immoral to breach a contract or walk away from a loan. It can be viewed as purely a business decision.
michal1980 said: and thats different then not paying you bills?Yes. A typical 'bill' is in exchange for services rendered. Using the service without paying for it is indeed a different matter.and since when is FWF not about morality? been here long enough? come on now, if he was trying to get away with not paying a bill, 1/2 this place would hang him... But since the market turned sour its ok now to pay less?Again, this is not a bill in exchange for some service. His monthly payments are part of an agreement he made with the bank. The rest of that agreement went along the lines of "If you do not pay, we will take your house." If the lender was not OK with the possibility of default, they wouldn't have gone ahead with the mortgage. They're not a charity, they're a business. They don't have to sell everyone a mortgage.When the market was going up, should the lender come back and tell the homeowner, I know the loan we gave you was for 400k, but the house is now really worth 800k, and we just doubled your loan?Now that just makes no sense.
michal1980 said: and thats different then not paying you bills?
and since when is FWF not about morality? been here long enough? come on now, if he was trying to get away with not paying a bill, 1/2 this place would hang him... But since the market turned sour its ok now to pay less?
It is an interesting question, although totally unrelated to the topic at hand. I would suggest that "we" get more upset about things like credit card defaults becasue it shows a serious lack of financial discipline that is most likely going to reoccur. Although I think most people who bought houses during the last few years had rocks in their heads, buying a house you can afford, as this poster clearly did, is not the same as being a deadbeat.
I see the option to walk in this case more like, say, United Airlines using the Bankruptcy courts to walk away from leases it had on aircraft. Both sides in the transaction know the options available to the other party. It's not personal, it's business.
kenblakely
Senior Member - 2K
posted: Mar. 11, 2008 @ 5:34a
michal1980 said: what happened to the 'pay up deadbeat comments?' I know that they dont apply to the OP becuase he wants to do the right thing. But the fact that people here are actually talking about short sales, walking away, hinting at foreclosuer. etc. WOW.I gotta sympathize with Michel1980 on this. FWF is riddled with "You signed a contract; take it like a man" comments on countless other threads where people suggested breaching a contract as a business decision. I tend to think the deepening financial crisis is making many of us reevaluate our morals, and crises tend to do.
FWIW, I'm firmly in the 'business decision' camp. OP should do a cold, rational analysis of his alternatives. If it makes long-term financial sense to stop paying, delay the foreclosure as long as possible so he can live rent free and walk away when he's forced to, that's precisely what he should do. He's not robbing people or cheating old ladies here after all - the big banks and mortgage companies can take care of themselves.
after this thread, I'm going to rip everyone that says pay you bills dead beat. Same difference, the market changed for me... I bought stuff on credit thinking i'd have more money next month, but bad thing a,b,c, happened to me, if the big business can write it off, heck so should I.
Its funny when the difference is 100k+ its a smart buisness move, when its a few grand your a dead beat. Theres lots of true deadbeats that come in and ask for help, and people around here are probably correct to be cold as all hell. But I see now that its all just hot air, reach a limit and everyone wants to get out from the contracts they signed.
And why doesn't the following make sense:
Next time the housing market goes up, lenders should be allowed to re-write the loans for the higher value of the property.
If you are arguing it should be allowed to re-write the loans when the value goes down, then the opposite should be correct as well?
52club
Ancient Member
posted: Mar. 11, 2008 @ 6:25a
I find it interesting that we hold individuals to high moral standards, but since large business/corporations continually screw people over they don't get held to the same standards. I understand two wrongs don't make a right. However, if those who bring up the moral issue believe a corporation wouldn't stick it to an individual to pad their bottom line they living in a dream world.
Skipping 122 Messages...
Dealguy123
Senior Member - 2K
posted: Aug. 11, 2008 @ 12:05a
qcumber98 said: I'm in CA and according to Zillow, I'm down $50K since I bought my condo two years ago. I've already paid off the second loan ($18K) and $15K on the principal. I'm not panicking.
Just as a heads up for anyone that uses Zillow.. Some of their estimated home values are WAAY off, and some are spot on. The best way is to use comps and recent sales vs. zillow. For example.. I know someone with a condo that has a value of $370 according to zillow (was purchased for just over $400k). Well, the IDENTICAL condos in the same development are selling for ~$200k. Just a heads up is all. Good luck.
Disclaimer: By providing links to other sites, FatWallet.com does not guarantee, approve or endorse the information or products available at these sites, nor does a link indicate any association with or endorsement by the linked site to FatWallet.com.
Members of our community may attach files to a post in accordance with the User Agreement. FatWallet is not responsible for the content, accuracy, completeness or validity of any information contained in any attached file. Files have *not* been scanned for viruses. Be especially wary of Excel files which may contain malicious content.
