What To Do If You Are Underwater On Your House

Many of us are finding ourselves living in homes worth less than we paid to purchase them (myself included).  Some of us purchased with a down payment, to find that equity we started with evaporating at what seems to be an alarming and relentless clip.  Some of us purchased with little or no money down and feel stuck in a home that cannot be sold for what is owed on it.  These are troubling times for the recent homeowner – and many of us need more than a mortgage 101.  But I’m here with a message of hope.  I recently met with a young woman who purchased a home with zero down in 2007 for $225,000.00 and bought with a fixed rate INTEREST ONLY product (meaning: she still owes $225 against it).  She wanted to see what a refinance would look like for her.  I told her to {C}brace herself for what the appraisal would show us.  I suggested that we look at an FHA refinance which is the loan that allows for the least amount of equity (FHA will allow 97.75% of the appraised value on a rate/term refinance in Portland) and hope for a strong appraised value.  Well, we got the appraisal and the value came in at $177,500.  What this meant to her was that if she wanted to proceed with this refinance loan she would have to bring over fifty thousand American dollars to the closing table to make it go.  Crazy, right?  Of course, that is a deal killer, right?  Wrong, we’re going ahead with this loan and we’re happy to do it because it makes great sense for this particular borrower, and here’s why:

  1. The loan she is currently on is particularly horrible.  It’s a fixed rate, no mortgage insurance loan at a rate of 8.5%.  We are able to get her a new FHA-insured loan at 4.25% (at the time of blogging this).
  2. She intends to keep this house for a long time.  Even if she wants to move in the future, her plan is to retain this home as a rental.
  3. She has access to the cash to make the loan work.
  4. The annual return on this cash ($55,000 to be exact) AFTER TAX is $3,540.  She will spend $3540 less per year to own this home.

This return on cash is about 6.3% AFTER TAX — meaning adjusted for the lowered tax benefit of the lower interest rate.  Also, if she were to invest this $55k, any gains would be taxable so she’d have to make about 15-20% more return to net this same amount. This is a good return on your money if you ask me, and the best part is that its guaranteed.  Additionally, if we can average a 1.5% property appreciation over the next 10 years, she will be made whole again on the $55k she initially parted with (unfortunately this part is NOT guaranteed… although quite likely I think).

When you put these factors together along with the experience of feeling the IMMEDIATE benefit of the new and improved loan.  You can see why we think moving forward is the right move.

If you would like me to do some analysis on YOUR particular situation, I would be happy to create a custom report that shows what these low rates can really mean for you.  Generally, if you have the cash, AND the intention to stay in the home for a while, re-structuring your current financing could be a no-brainer.

Call or email anytime!  I am licensed to lend in both Oregon and Washington.

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