Our house recently appraised for $200K, we owe $225K, our rate is adjustable but only 3% right now (adjusts again yearly, maximum 2% increase annually). We’re likely to move in the next few months, but think we should hang on to this house and rent it out for a while (we have some landlording experience), and see if after several years it will regain some equity. But we’d probably lose a few thousand $$ each year (ie somewhat negative “cash flow”).
I can refi now for a 30yr at around 4.5 – 5% fixed. Would cost me about $5k to do, as well as about $20k buy in, which we could afford. Would you do that, or just wait a year or 2 to see what happens with our adjustable rate. Also could consider a 5/1 or 7/1 in our situation. Our income is around $200k/yr, so the tax deductibility would be welcome.
This problem is hard to solve, I’ve struggled with how to answer this for a good day now. I’ve even spoken with our in-house mortgage broker debating your situation for a while today. This is truly one of those “damned if you do, damned if you don’t” situations. You provided a good amount of info, but I’m actually left with more questions than answers.
What I came up with is that if you’re looking for the solution that minimizes your losses and protects your credit the most, than staying in the home and keeping the loan that you have is probably your best bet. You could always try to sell it as a short sale, but with income of $200k/year and especially if you have assets, it may be difficult to get the lender to approve it. It will cost some cash out of pocket to sell this home right now, that’s pretty much a guarantee. I don’t know whether you NEED to move or not, but the best case scenario would be if you could stay in the home for a few more years. At least until you can sell the home at a break-even or with paying an amount that you can easily handle and move on from there.
In considering the refi and rent idea I ran your numbers through a basic 30 year amortization calculator and it looks like this:
Borrowing 225k @ 3% = $948 monthly payment (p&i)
Borrowing 200k @ 4.5% = $1,013 monthly payment (p&i)
Refinancing will likely leave you with higher payments, even after buying in for $20k-$25k. The negative cash-flow probably won’t get fixed either and you’ll be adding to your losses each and every month. Yes, refinancing would eliminate the adjustable rate problem, but it’s going to cost you a ton of money. When you start adding in the buy in, closing costs, vacancies, repairs, and emergency costs that associated with the refi and rent idea, it sounds like a lot to simply protect an investment, that may or may not ever pan out. After spending all this money how much do you actually stand to profit in the end?
If you absolutely must move and you have to rent it, I would say staying in the loan you have now is your best bet. You will still lose the negative cash-flow every month but I just can’t wrap my head around the idea of dumping another $20k-$25k into a home that’s already underwater. To sell the home and wash your hands of it, maybe, but not to refinance and carry the place.
I may be completely wrong and I would certainly look for a second opinion if I were you. Your local real estate community would probably be your best source for this information. They will have their finger on the pulse of your local real estate market and may be able to see something that I am missing. Just be sure to weed out those that are clearly trying to “sell you something” and those that are willing to honestly help you out. You can also keep us posted on your progress or ask more questions in the comment section below. I’m subscribed to this post and will do my best to respond promptly.
Andy is a licensed real estate broker in Massachusetts and is the founder of Northeast Properties in Norton, Massachusetts. His brokerage is designed to help homeowners in today’s difficult real estate market, specializing in short sales. Andy speaks with Massachusetts homeowners every day, helping them to address their questions or issues with short sale or loan modification. He enjoys helping consumers arrive at the correct solution to their problem, and believes that the only way to correctly do that is by presenting them with all of their options in an un-biased manner.