Underwater Mortgage but want to buy? Here’s one solution

    8 Day Break CourtLet’s say you bought a home before 2009. Since the crash, it’s lost 20 to 40% of its value and your mortgage has been currently underwater (that is, the amount you owe is higher than the amount you can sell it for).

    If you’re planning to stay in your home long-term, this isn’t really a problem for you right now. But what if you need to relocate, or have outgrown your current space, or are itching to downsize?

    Typically an underwater mortgage means you’re trapped. But right now, you might not be.

    Currently, the housing market is very strong. The current value of your home may be higher than it has been in the past few years, and you may actually be able to break even. (You can use The Haro Group’s Home Valuation tool to determine this.)

    In addition, mortgage interest rates have been at a 100-year low, and are only now starting to climb again.

    An unconventional solution to an underwater mortgage

    If you know you’re going to need a new house in the next few years (or needed one yesterday), consider taking advantage of the current market and buying a new home—while keeping your old one.

    Granted, it’s an unconventional solution—owning two homes at once—but there are economic advantages.

    First, your current home can generate income as a rental property. Rental income can help cover the cost of your old mortgage and can help you pay off the full amount faster, so you own the home sooner than you originally planned.

    Second, you can take advantage of the unusually low interest rates while they’re still here. Right now, you may qualify to keep your old home while buying a second on a 15-year mortgage. When rates go back up, this opportunity may be lost.

    A hypothetical example

    Steve purchased his home in 2006 for $255,000. The value went down after the crash and he found himself with an underwater mortgage. But now in 2014, the value is back up to just under what he currently owes. So for a short time it’s still underwater, but just barely.

    Steve’s current payment (including his 5.5% interest rate) is $1,636. He does his research and finds that in his area, he can rent his property out for that amount each month. If in addition to that rent he pays just $600 a month towards his mortgage, he can pay it off faster and own the home in 15 years instead of 30.

    Steve calculates that he can purchase a new home for $300,000. In years past, he would have gotten a 30-year mortgage at 4.25% for a monthly payment of $2,026. But with the historically low interest rates, he realizes he can swing a 15-year mortgage with only a 3.5% rate, and will only pay an additional $695 each month.

    So for both homes he is now paying $3,321 a month (as long as rent covers his original mortgage). This is $1685 more than his what he currently pays for the one home (about double).

    But the advantage is he will now own two homes in 15 years instead of one home in 30 years. And once the first home is paid off, it can continue to generate rental revenue long-term.

    Sound crazy?

    It might be. Or it could be a smart investment, depending on your financial situation. However, this opportunity will probably only be around for another year or two while the housing market and mortgage rates are still favorable.

    Not sure whether this is a good solution for you? Talk to a housing expert at The Haro Group. We’ll help you determine what your home is worth, and explore other homes in the Greenville area that fit your budget.

     

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