Here’s my situation:
[ul]
[li]I am 36[/li][li]I earn $100k/year[/li][li]I have 50k in IRAs / savings[/li][li]I bought a house for $535k in 2006 that is now worth more like $450k (if I am lucky)[/li][li]I owe $485k on the mortgage.[/li][li]I got a mortgage modification down to 2.62% a couple years back and my monthly payments are around $2500 including PITI. This will increase to $3000 in 5 years or so.[/li][li]I want to get married, have kids and let my wife stay at home.[/li][/ul]
I know I need to save more, working on that. My main question is: What should I do about my house? Options:
[ol]
[li]Stay there and keep paying the mortgage[/li][li]Stay there and stop paying the mortgage[/li][li]Move and rent the place (might be able to get $2500/month)[/li][li]Attempt to sell the house and either keep paying or stop paying[/li][li]Attempt to negotiate a “short sale” of the house[/li][li]Attempt to negotiate a “deed in leiu” on the house[/li][li]Attempt to convince my lender to just knock a couple hundred thousand off the principal balance (yeah right)[/li][li]Give up on dreams of family/retirement and move to a shack in the woods[/li][/ol]
Why not just hunker down and wait until property values recover? Are you in a decent neighborhood? Is your house in good shape? Is your job stable?
While it’s no fun being upside down, it doesn’t sounds like you are in a desperate enough situation where you will have to sell your house or go into foreclosure. Unless I misunderstand your current situation.
Things are bound to improve within the next 10 years…
What is your net take home pay? If you’re making $100k/yr, once you pull out taxes, 401k, medical, etc… You’re probably down around $6k-6.5k per month, yeah? If so, you definitely need to get out of that house, as you’re spending nearly 50% of your take home on your mortgage. Most financial advisers I’ve heard say that this percentage should be around 25% if you’re ever going to get ahead.
Was your income at $100k in 2006 when you purchased the house? Just curious.
You need to speak with a professional financial planner about this. Relying on anonymous posts on a message board, even if many posts here are sincere in assisting you, is too dangerous.
My net take home after 15% savings is only $5k/month.
My income was $80k when I purchased the house.
My job is stable, I am just not so sure that prices are going to come back.
Also, there are many ways to “get out of that house” all the way from selling for what I can and paying off the difference from my savings (wipe out all savings but preserving credit) to ceasing to pay my mortgage and attempting to stall foreclosure while saving as much as possible (could add $30k to savings this way but kill my credit score).
Why not let your wife work for the first few years to pay down the mortgage? It’s really a relationship saver to have a few years together before the kids come. And heaven forbid something should happen to you, she and the kids will not be completely destitute if she has some work experience.
Practice the two of you living off of your salary, and use hers half to pay down the mortgage principle and half for savigns. You should be in much better shape by the time you are ready for children.
Seriously, my first thought here is “why is this an emergency?” If you can pay your mortgage now, and the wife and kids are still totally hypothetical (never mind whether your hypothetical wife would even want to stop working after she has your hypothetical kids), you don’t need to do anything drastic like walk away from your mortgage, in any case.
If your main immediate worry is not spending so much of your take-home pay on housing, and you think you can rent the place out for something close to the mortgage payment, why not do that, move somewhere much cheaper, and sock away a bunch of cash?
On that last point…Hm. When I wanted the impossible, my parents were fond of saying “people in Hell want ice water, too.” You are currently saddled with a big financial obligation; taking on an unemployed wife and producing hungry kids is not logistically possible until you deal with the present situation.
Selling your house: you’ll end up paying 3% to your realtor and another 3% to the buyer’s realtor, so selling for $450K means you’ll end up with a check for $423K. That leaves you owing $62K on the mortgage, which you can’t pay off right now because you don’t have that much in savings.
“Stay there and stop paying the mortgage?”
Foreclosure will happen eventually. You may face an unpleasant eviction not at a time of your choosing, and your credit rating will be shot. Life gets very difficult with a craptastic credit rating.
“Move and rent the place (might be able to get $2500/month)?”
Consider staying there and taking on roommate(s). Might be awkward, but face it, you are in dire straits; you need money. a $450K house must be pretty nice? Two other guys paying $600/month each would boost your income substantially. Do this for a few years, watch for housing prices to (hopefully) rise, and when the market and your savings are at a point where you can cover the difference between price and mortgage, put the house on the market.
“Give up on dreams of family/retirement and move to a shack in the woods?”
You need not give up on your dreams, but they may have to wait for a few years. If you’re lucky enough to find/marry a woman who has amassed/inherited a substantial nest egg and is still young enough to bear healthy children, then you might be able to get out from under this sooner than expected. Almost as good: finding/marrying a young woman who wants to work for several years before starting a family. Look for a woman recently graduated from college with little/no student debt, someone who wants to work until she’s ~30 before she starts having kids and staying at home.
The bottom line is that purchasing a house way beyond your means was a very bad financial decision, and now you are reaping the fruits of it. All the advice you receive in this thread is worth pondering, but the best is probably from Duckster: you need to consult a professional financial planner who is more fully aware of all of your options.
Or a variant, assuming the wife is still hypothetical (i.e. you’re not engaged / close-to-it with a lady), get a roommate.
You’ve got a pretty steep mortgage - the balance is more than ours is, and we’re dual income, and we don’t have a huge amount of spare cash ourselves. Of course we do have kids, which sucks up some cash you don’t have to worry about.
Still - you’re spending 50% of your take-home pay on the mortgage. I’m stunned that the bank let you take out that loan in 2006, with an even lower income, but the banks were far too lax in their underwriting.
If you weren’t so tight on the mortgage payment, I’d suggest you stay put and ride it out (assuming the house is otherwise a good choice for you and the wife / kids).
The short sale / deed in lieu options might be reasonable for you but check your mortgage documents and local laws - you might be on the hook for the difference between what the house sells for, and what you owe. So there’s 35,000 right there that you might still owe.
What would happen to the payment adjustment in 5 years, if you were to stay put and try to scrape up extra cash to pay down the principal further? Might that lower that 3,000 to a little less? And what kind of rate might it be? the then-market adjustable rate? Just tossing out things to think of.
If you do want to stay put, getting a roommate really might be a great way to go. Every penny he (or she) contributes is that much you can put aside to pay down the mortgage, or save against the day when the payment goes back up.
If your wife is at this point hypothetical, then your housing costs (interest, mortgage insurance) are way higher than you should have (based on your income) and for way more than you need (assuming it’s just you right now).
Now, selling the place and buying or renting a smaller apartment might be difficult because you’ll need to pay off the extra $40,000 between the mortgage and the sale price. I’d check and see if you can borrow from your IRA to help pay that off. If so, the downsizing move might be the best way to start saving more.
Otherwise, I’d consider moving to a rental apartment and renting out the house, or taking in a roommate. Or getting married to someone who has an income.
I personally don’t think defaulting for $30,000 is worth the hassle of bankruptcy, but I suppose your milage may vary.
Wife is not hypothetical. I am engaged! She is fine with working, but she doesn’t have a well defined career. She’s 30. We want to have kids in 2-4 years.
My 2 cents worth - Keep paying the mortgage.
The alternative is (as others point out) you owe $60K-plus, and still have to pay rent on the shack-in-the-woods.
Being underwater does not matter as long as you are not trying to sell and can still make payments. After all, if you dump the place you have a very heavy burnden and will not buy much of a repalcement house. If you stop paying, you will be financially toast anyway.
Odds are that $60K will not translate into a 2.6% loan with no equity, and probably not a 25-year amortization - so what do you think your payment will be, for absolutely nothing?
If you do soon have a wife and 1.5 kids, what do you think you’d pay in rent anyway for a decent place and location?
Yes, pay of the house ASAP - the “use her income” plan is a good idea.
Sit down with a calculator together and figure your plan.
Kill as much of the principal as you possibly can while you still have this gift of really low interest rates.
If she had a savings plan like you, that allowed withdrawals, then there’s a way to get some money out when she stops working. No income = lower taxes on savings plan withdrawals in most states. I only suggest this if (a) it actually all goes to the mortgage and (b) you have the discipline to put money back into the savings once she resumes working and the mortgage is under control.
However, things will be tight for a few years. Resign yourself to the facts that:
You will at least have a nice home for this.
In X years, then it’s time to start working on the kids side of the plan as long as you stick to the plan.
Your wife can skip working for a few years if the numbers work (especially if it’s cheaper than day care), but the days of permanent stay-at-home spouse are long gone unless you are a brain surgeon or investment banker.
I’d be VERY leery of touching any retirement savings for this, unless all other avenues are exhausted.
Yes, you might not pay a LOT in income taxes, relatively speaking - but at 100,000 in income (his salary), you’d still be in a somewhat higher bracket, so let’s assume 20-25% gone to the federal govermnent right there, not to mention penalties for early withdrawal. Most states would consider this taxable as well, assuming the savings were made pretax.
Borrow against the 401(k) if absolutely necessary but that has the same risk - a job change, and you have to pay it all back right away or it gets treated as a distribution also.
At least 7 years, and I’ve heard a short-sale is viewed the same as a foreclosure or bankruptcy by most creditors. Also, it’s an incredibly slow and most often unsuccessful process.
We’re sort of in the exact opposite from your position, went ahead and had the baby in December and so we’re now on one income, renting very cheaply (about $750/month) with about $50,000 in retirement savings, $25,000 in the bank and wondering whether to buy a house or not. Personally I’m happy to stay where we are but she’s pretty keen to start looking to buy a house.
Unsolicited advice about the baby/one income situation follows:
-You certainly notice the income drop, our savings per week has more than halved and we don’t go out nearly as much as we used to.
-On the other hand we don’t want to go out as much anyway as we’ve got a baby to look after.
-There’s an enormous amount of baby stuff that you could buy which adds up very quickly if you buy new.
-However most of it is pretty optional, and the stuff you really need can be bought second hand anyhow (except car seats - you don’t want to mess with that). As far as toys go, our little one seems just as happy playing with an empty tissue box as she is with any of her real toys.
All in all I’d suggest staying put, getting married and having the baby. You’ll be able to cope on $2,500 a month after house payments and savings pretty well I reckon.
Instead of a roommate, why not just have the fiancee move in now? She could take another bedroom if you don’t want to live in sin. Or you could get married immediately. (If your finances are that bad, you probably shouldn’t have an expensive wedding anyhow.)
This suggests the hit would be anywhere from 100-300 points. I presume less of a hit if your credit is already in trouble (which you haven’t indicated). It would be a while before you could get decent credit afterward, in any case.
Basically it might ultimately be the right option for you but I wouldn’t rush to it unless you’re having trouble keeping up right now, or are otherwise forced to do so.
The problem is he has a house that’s way more expensive than he can afford, and he wants to figure out how to take on the additional burden of a stay-at-home spouse and eventual kids. The monthly nut on that house is going to cripple him.