mortgage

What if you're upside down in your home?

John and Sandy would like to move into a larger home, especially since prices have fallen. For a while they considered buying a second adjacent unit in their condo complex, but have since changed their minds. It would require a big investment to combine the two. They also considered buying a place and then renting it out, but are having second thoughts. "I think the only thing worse than having one house with negative equity would be having two," John says.

The mortgage amount is $190,000. The condo unit was financed with a hybrid adjustable rate mortgage with a 6.5 percent rate for the first seven years.

Says John: "Since getting married, the extra storage needed along with dual incomes and lower home values have made moving into a larger home more desirable. Unfortunately, it seems next to impossible to unload our condo for an amount that is anywhere near what we owe. In the end, accounting for our negative equity, buying a house today is as expensive for us as it was three or four years ago."

What are John and Sandy's options? See what three financial planners have to say.

Michael Kitces, CFP, weighs in

Pinnacle Advisory Group
Columbia, Md.

Unfortunately, there really is no magical solution for this. The basic options available are relatively straightforward:

1) Reduce the asking price, and sell the condo for the best they can get. To the extent that the net proceeds after selling costs are less than the mortgage, they may need to make up the cost to the mortgage company by bringing additional cash to settlement. But at least this will get them out from under the current mortgage/property, and give them the capacity to purchase a new property. Of course, any payment they make to rectify the negative equity on the current condo would diminish the down payment they would have used for a new property!

2) Buy a new property, and try to rent the old one. Whether this is feasible or not will depend on a few factors, particularly whether it is even feasible to rent the current condo, and whether they can get enough rent to cover at least the mortgage, condo fees and other expenses of the property.

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In addition, this is really only an option if John and Sandy have enough income to qualify for a loan to buy a new property (not to mention having enough for a down payment), while still maintaining the old mortgage. If this is an option, then once the equity balance is positive on the old condo, they can try to sell the property. Of course, it's worth noting there's a risk that waiting could just make the negative equity problem worse if the property declines further in value!

(Editor's note: HOA bylaws stipulate that residents can only rent a condo six months in any 12-month period, according to John. So renting the old condo is not an option.)

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