House rich and cash poor
I have a $340,000 mortgage and a $160,000 home equity loan. I also have $800,000 net equity in my house but have little in savings. My income is going down this year and my monthly expenses are barely being met.
I'm in need of a new car as mine is over seven years
old and I have a $20,000-plus sewer hook-up that is coming up that
I don't have the money for. I am equity rich and cash poor and don't
understand or know what to do next.
-- Scott Scenario
The easy solution is to sell the house. You've got a home
that by your estimation is worth $1.3 million, with half a million in mortgage
debt, while driving a seven-year-old car and trying to figure out how to finance
a sewer hook-up that represents 1.5 percent of your home's value. You don't have
any savings and can barely meet your monthly expenses.
If you're not quite ready to take that extreme of
a step, then look into restructuring your debt in a manner that
gives you cash for your needed purchases and reduces your monthly
debt service payments. This can be done by lowering the interest
rates on your loan(s), extending the loan term or both.
A new first mortgage with cash-out to pay off the
home equity loan and finance both the car and sewer is one option. You'll
want to make sure your existing mortgages don't have prepayment
penalties and do a little rate shopping on what a new loan would
be based on your credit history and income.
lower interest rate can reduce the debt service expense, as can extending the
mortgage debt out to 30 years. You will no doubt end up increasing your total
interest expense on the home by extending, but it should free up some money in
your monthly budget.
Selling the house has a lot of expenses associated
with it, such as moving costs, real estate commissions, redecorating
the new location, etc. But if you aren't able to live within your
means in the current house, and you're not sure what's going to
happen with your income in the future, taking on more debt to preserve
a lifestyle you can't afford is only postponing the transition,
not avoiding it.
My best advice is for
you to meet with a fee-only financial planner and discuss your finances in depth
with him or her. An earlier Dr. Don column provides tips on finding
a financial planner.
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "financing
a home," "saving & investing" or "money."