Upside down in house…what options do I have?

Jason: Upside down in house…what options do I have?
I bought my house in the end of 2005 for a little over $ 350K and it is now worth only $ 230K according to recent appraisals in my neighborhood. I did an 80-20 mortgage, but have since paid about 30K into it, mostly in the 2nd mortgage. The 1st mortgage for 80% was a 5-year ARM at 6.5%, so we would like to lock it into a fixed rate before the end of 2010. I am the only person on the 1st mortgage.

In 2007 I got married and my wife and I refinanced our 2nd mortgage with a HELOC, so that is fluctuating with the prime rate right now. It is currently 4.99% so we are in good shape there, for now anyway.

We can’t refinance because we have no equity in the home. We are afraid that once the 5-year ARM expires, we may not be able to afford the payments, depending on what rate we get. We would like to be proactive in bettering this situation before that time comes. Do we have any options? We even thought of just foreclosing the house and renting for awhile while the market gets better. Is this a bad idea?

Answers and Views:

Answer by Frank112
Around 2012-13 many are speculating that homes will come back to the prices they were in 2007. My advice is that if you can hold out to then, do so.

Answer by Your Accountant Stands w/ Israel
You can’t foreclose and rent the house, it doesn’t belong to you anymore.

First of all, don’t sell for a loss, that’s just silly. Hold on for the five years before you do anything rash. The situation should recover by the end of 2010 when it comes to housing, absolutely no reason or incentive to sell now (if you even could — some houses sit on the market for years!).

Answer by v b
Unless you have lost your job and your ability to pay, you sit tight and make your payments.

When you did the original financing, you were well aware of the ARM’s ability to reset and still signed. The lender was supposed to take your ability to pay at any ARM level into account when approving you for the loan.

Remember, you borrowed money, not a house. You owe money back regardless of the value of the house.

Answer by realtor.sailor
I’m not an attorney, but have been a Realtor for 30 plus years. Your situation is not unusual in today’s market. It looks like you are about $ 70,000 upside down. That’s about 20%. If you can hang in there for a year or so, do it. The housing market will come back and homes will again appreciate. Only consider foreclosure as a last resort. First, your mortgage (probably) contains a deficiency balance provision. That means if the lender forecloses and sells the home for less that you owe, they can obtain a deficiency judgment against you for the difference. Plus, it’s a major credit hit. There are two other options; short sale and deed in lieu of foreclosure. In a short sale the property is sold for less than you owe (with your lenders approval) and with a deed in lieu of forclosure, you voluntarily deed the property to the lender, again, with the lenders approval. In most cases there is no deficiency judgment with the latter two. Credit hit not as bad as a foreclosure. Consult a real estate attorney.

Realtor.Sailor