Auto Refinance/House Upside Down

[ChandlerHeel]

Alright, everyone, simple question...we are about 40K upside down on our house. We are very anxious to move to a bigger house right now. Would rather not walk away or do a short sale. Don't want the credit hit and don't want to do it for ethical reasons.

The value of our car is about 20-23K. 2007 fairly loaded Odyssey. It is totally paid off. We have enough cash on hand that with 20K we would be close to being able to get not upside down anymore. Is it possible to do this type of refinance where we cash out the value of the car and get a new five or whatever year loan?

Thanks!

[jpg7n16]

Even if it were possible, you wouldn't be able to have 20% down for your new home.


So you wouldn't be in a position to advise the purchase of a new home. And all you'd be doing is shifting from likely a low interest tax deductible mortgage, to a moderate-high interest non-deductible car loan.

[ChandlerHeel]

Thanks for the reply. Alright, well, the other option is to rent out our house. Luckily, we have friends who want to rent our house, at least the last time I checked. But, being 40K upside down, I'm concerned about the length of time it will take to get not upside down. If our friends only stay in the house for two years for instance, renting to strangers after that is not something that I want to deal with. I know there are property management companies...

As far as the mortgage being low interest and deductible and the car loan being high interest and non-deductible, yes, I know that. This approach would be faaaaaaaaaaaaaaaar from ideal.

Honestly, I am a newby when it comes to house finances, but FHA loans only require 3.5 down. I realize that ideally, you would have 20% down. Again with the not ideal thing. I know about mortgage insurance.

Here are the options that I see...the goal here would be buying a bigger house say within a year's time:

1. Walk away/short sale
2. Tough it out in our small house and be glad we have a roof over our heads. :-)
3. Rent out.

Just wondering if there was possibly a fourth option of using the value of our van.

Thanks!

[jpg7n16]

Just wondering if there was possibly a fourth option of using the value of our van.

Thanks!

You could sell the van for $23k and purchase another van for $5k.

That would free up $18k of capital. Which could then be used to pay down a good deal of the mortgage. And would get you that much closer to not being underwater.

Then save up cash for a year or two or three. (work with your budget to be able to save 15-20% of your income) Depending on your income, that could easily be $10-15k/year. You were able to pay off your car and have $20k in cash, so I figure you've got the income to make that happen.

$40k upside down - 18k from sale of car = $22k. After 2 years maybe even the house will rise in value.

If $5k is just too far out of your comfort zone, try $10k. $40k - 10k = 30k. Maybe 2 years of saving.




Though if you'll only consider options that let you move into the new bigger house tomorrow, I don't have any recommendations for you. I would advise against doing that.

[ChandlerHeel]

Thanks for the advice jpg7n16. Yeah, income is good.

Yeah, as far as the timeline goes, my wife probably feels differently. :-) But, I would consider a year at most roughly to be the goal. Otherwise, we had been considering some longer term improvements like hardwood floors throughout the house. Then, we started thinking about moving up, so we put them on hold. Once we start talking about two-three years, that would be long enough that I'd probably start thinking that we're in it for the long haul (like five years minimum) and just go ahead and improve this house.

I know...every option has its downsides. :-) Regardless, thanks for the input. Anyone else feel free to chime in.

[disneysteve]

2. Tough it out in our small house and be glad we have a roof over our heads.

Option 2 is the only one I would consider in your situation. You'd like a bigger house. That's nice. You can't afford it, plain and simple. Until you can sell this house and at least break even AND have 20% to put down on the next house AND have a 6-month emergency fund in place, you stay where you are. Oh, and you also don't get to do any non-necessity upgrades to the house since you can't really afford that either.

If, however, making some cosmetic upgrades to this house would make you both willing to stay there for the long term, like 10+ years, it might be worth putting out some money, but that would depend on your overall financial picture, if you have your EF, if you are saving 15% for retirement, etc.

[maat55]

I fully agree with Steve. This is the age old decision between forcing what I want and making a good decision.

What is unfortunate is that the OP has a spouse that wants what she wants no matter what. It all comes down the mental prioritization of a house over financial propserity.

[jpg7n16]

I fully agree with Steve. This is the age old decision between forcing what I want and making a good decision.

What is unfortunate is that the OP has a spouse that wants what she wants no matter what. It all comes down the mental prioritization of a house over financial propserity.

I think the OP also has an OP that wants what he wants no matter what.

From what I gather OP is searching for some way to make this new home happen very soon. Trying to find some way that even though he knows it wouldn't be financially smart, he just wants it to happen. And maybe his wife wants it too.

Sometimes when we want things badly enough, our mind makes up reasons why it's the smart thing to do - even though looking back we know it was dumb. Or even when we're doing it, in the back of our minds there's that 'I really shouldn't be doing this' thought.

So the OPs mind is coming up with ways to shift debt around (which serves no purpose really, the debt's not gone, it's just moved over here), ways to get renter's into the home (without considering that the going rent rates are likely not enough to cover the mortgage, or the impact that a vacancy would have, or that 2 years of renting isn't enough to pay down $40k of debt), ways to get in the new home with little to no money down (even though he knows 20% is recommended by any advisor worth his salt), and even the wife wants the new house (which is prob true, but has no impact on whether they can afford it right now).


I'm reminded of me telling myself why I deserve that brownie sundae at On The Border. I know it's bad for me, but I've worked hard this week and deserve something nice. I know it's working against my diet, but it'd just taste so good! So I tell myself "just this once" - and I wind up telling myself "just this once" every other time I go.

And I wind up not making the progress with my weight that I'd like to - just like OP will not make the progress on his finances that he'd like, because we both willingly do things that are bad for us, because we want something badly enough.


Don't be fooled - the OP wants this new home just as badly as his wife does.

[maat55]

Don't be fooled - the OP wants this new home just as badly as his wife does.

Your probable right.

[dczech09]

Yeah what is the deal with this "want" stuff? I WANT a million dollars. I WANT my car to be paid off. I WANT to not have had to pay $400 yesterday to repair my car. I WANT to live in a house, not an apartment. I WANT others to have the same level of financial literacy that I have. These wants are not reality.

You WANT a bigger house, but do you NEED a bigger house? Even if you did, there is one fact. You cannot afford a bigger house so be happy with what you've got. Look, there are many people out there who want the same things you want. Some people have control over their life and don't let wants wreck them. Others have no control and make poor decisions.

Walking away from you house or undergoing a short sale with trash your credit, so buying a mortgage afterwards (even with 20% down) would be difficult if not impossible.

The 3.5% down on FHA loans was mentioned. Terrible idea! Its the joke mortgages that got people into trouble and underwater in their homes in the first place.

Get yourself out of the water first. If you attempt to get the bigger house now, you will find that you will not get the house; the house will get you.

[zetta]

We'd need to look at actual numbers to see if this would work, but it might be possible to rent out your old house for enough to cover mortgage and expenses, and then rent the bigger house for you to live in while waiting for the market to recover. A friend of mine did this when she realized she'd made a big mistake with the house she purchased.

[LivingAlmostLarge]

Ditto Zetta. I have friend renting their old place and renting a bigger new place. That is a possibility.

[ChandlerHeel]

Alright -OP's wife here. We have made a decision. We are not going to do anything weird or creative with shifting debt, with the car or whatever. The van is with us for the long haul and we plan to keep it since it is paid for and is pretty new and meets our needs. We have NO other debt. We HAVE confirmed with the family who wants to rent our house. They live down the street, need a slightly bigger home, and it is a perfect fit. They can't buy for a few years (read: credit screwed up from a short sale). The rent WILL cover our mortgage, etc. Our plan is over the next few years for the rent payments and market value to meet and then it can become an income property or one we can unload it then if it feels right. Probably more likely than not sell it.

Not sure the husband mentioned - we are in the Phoenix suburbs market and it is one of the most messed up markets in the country. We live in a tiny 3 bedroom house we bought 9 years ago when we had one little baby and planned to stay 3-5 years. Our growing family of 5 needs more space. We are glad we didn't sell our house at the peak of the market 4 years ago and buy at the peak also because we would be WAY more screwed and upside down than we are now. We don't want a McMansion. We need space for a home office for my husband. We will end up living closer to family.

Someone has advised us to cut our losses and get out of this house, a short sale. We feel strongly against that. Everyone is happy to ride the equity roller coaster up but then walk away from their house when they are pissed value has dipped? That is wrong to us. I know too many people who have known they were screwed so they went ahead and bought a new house (and a new car because they know their credit will be jacked for 7 years) and walked away from the first one. They stop making payments but let renters move in month to month. They collect rent on a house they are letting go and the renters know that sometime they will get kicked out when it forecloses. So what happens with the rent being collected that isn't used to pay a mortgage? They put in a pool or remodel the kitchen of the new home.

I am morally against all that game but it is VERY common in our market. We don't plan to "buy and bail". So this is what we have found to make it work. We plan this next home to be our "forever" home. We know this house we live in isn't it.

I know this isn't Clark or Dave's or Suze's way. But that isn't always the best way for the circumstances. We accept there is some risk. But we also feel strongly about the move, to the area we are looking at, to the changes it will bring our family. We DO have a good chunk to put towards the next house. More than FHA - don't worry.

So thank you for the advice. I wish our situation was more ideal but it isn't. We are trying to make lemonade out of lemons. I know many of you will have something to say contrary. My husband did go to the "saving advice" forum, after all.

[jpg7n16]

I'd like to say that I'm 100% with you on not 'buying and bailing' as you put it. I have the same moral stance on that as both of you do.

And I'm also not against moving to the bigger home, I just feel the timeframe won't be fast enough for what it sounded like you guys wanted. From what I'm reading on here, it seems like you would like to rent the current home to your friends, and move into the new home in the next 4-6 months or so - and I just don't know if that's realistic.

Even if you were able to have 20% down on the 2nd home, would you even be able to get financing for it with a $40k unsecured liability out there on home 1??

Would you be able to pay down the $40k and sell home 1 after 2 years of renting? What would your family do if your friends don't want to live there anymore? Or (God forbid) something happens to their family like job loss or death/disability? Can you afford 2 mortgage payments without a renter?


Owning 2 homes in your current position seems really risky, and I just can't really advise it for you right now. It might work out for you, but it's a risk. Though if you guys are willing to wait 2-3 years or so, I think you'd be able to easily pull off the move to a new home. Especially if the housing market rebounds any in that time.

[ChandlerHeel]

We have qualified to carry both with a renter - income and credit, no problem. Rent counts as 60% of the mortgage payment. So our debt taken into consideration is only 40% of our mortgage which isn't a ton. And the friend isn't just someone we are doing a favor - it happened to be a friend who was looking and the timing was right. My husband feels good about renting to a friend. But also there are mixed feelings about mixing business and friends.

I am sure by Little House on the Prairie standards, our current home is more than enough. But I am tired of having a master bedroom/home office/pantry/etc. I have grown tired years ago of one small living room and no separate family room or play room. My 3 girls share the worlds smallest bathroom. I am one of 3 girls - I know how much space girls need as they grow up. And we may not be done with 3 kids. Do I wish we would have made more headway on this current mortgage? Sure. I could learn a lot from all you savers. But we have come a long way. 7 years ago we almost fell down a slippery slope of consumer debt and quickly realized what a disaster that was about to become and got rid of it for good.