What to do with my underwater house, sink or swim?

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rich251076
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What to do with my underwater house, sink or swim?

Post by rich251076 »

Before anyone lamb bastes me on my decision I have to say my wife and I were very uneducated first time buyers back in 2004, so here goes.

2004 we bought a house no money down, 270k 30 year mortgage 6.3% interest only first 15 years. Now owned by Ocwen after GMAC went belly up.

House price dropped to 190k there after and has slowly been creeping back (probably with inflation?) to 245k today - Zillow estimate.

Being good drones we've kept up with our monthly payments and 12 years laters and we are at a point where we earn substantially more and have begun to screw our heads on financially (we both comes from families with no financial education and debt was a norm).

The house is a 2 bedroom ranch, good neighborhood on 0.7 acres of land, its a nice piece of property and we have been comfortable raising our family there. But we still owe the principle.

My questions is, does it make better financial sense to:
#1Refinance with a chunk down into a real 10-15 yr fixed rate 3-4% interest mortgage and focus firing on paying it off?
#2Carry on with my interest only and pay the principal payments when it ticks over?
#3Get out and do a deed in lieu, shortsale or something else?
#4Other?

I am usually earned to much to do any kind of refinancing programs offered up to now.

Admittedly we have been Ostriches with our heads in the sand up to now but I am at an end and would like to sort out our finances and look toward having at least something.

Thanks
orca91
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Re: What to do with my underwater house, sink or swim?

Post by orca91 »

I'd say first look at, do you want to keep the house or do you want to move?

If you like it there and want to stay, then do so. There's no need to move just because you can now. If you want to move, that's another case.

The housing market dropping, interest paid already, and all that is water under the bridge at this point. What's done is done.

If you want to stay, refinancing that mortgage sounds like a great plan! You can do much better for an interest rate now and pay much less in interest from here on out. Especially if you plan to pay it off early.

I bought a home in 2005, went through that downturn also, became an accidental landlord there in 2010, and finally got to a point I could sell in 2015. BTDT... It was what it was during that time.
sp0704
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Re: What to do with my underwater house, sink or swim?

Post by sp0704 »

If you are pleased with the home and its location, there is really no reason to damage credit from a short sale, handing back the keys, etc. This route will also likely preclude you from buying a home for the next several years.

Your best option is likely to refinance into a fixed rate mortgage. If possible, re-fi 80% of your loan balance (sounds like $216k) so you are not underwater on L-T-V. My guess is, at the least, you will need to pay down the loan to current property value in order to re-fi, and perhaps to 90% or 95% of value.

Over time, you will likely forget the price paid as you build some equity over the long-term and hopefully the value comes back to what you paid.
killjoy2012
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Re: What to do with my underwater house, sink or swim?

Post by killjoy2012 »

#1 - assuming you're happy where you are and have no impending plans to move.

The house being slightly underwater IMO really doesn't have much to do with it, other than if it affects your ability to refi into a traditional 10/15 year mortgage product. The appraiser will likely come out for the refi and you'll need see where that lands, but it should be close assuming you're going to put down / pay down 20% to get you to that magical 80% LTV level. Sometimes if you refi with the same lender, they won't even come do a new appraisal -- but I think Ocwen is just a servicer, not a loan originator.
joebh
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Re: What to do with my underwater house, sink or swim?

Post by joebh »

rich251076 wrote:My questions is, does it make better financial sense to:
#1Refinance with a chunk down into a real 10-15 yr fixed rate 3-4% interest mortgage and focus firing on paying it off?
#2Carry on with my interest only and pay the principal payments when it ticks over?
#3Get out and do a deed in lieu, shortsale or something else?
#4Other?
#4Other

Refinance into a real 30-year fixed rate mortgage.

Don't worry about trying to pay it off early, unless you have every other financial portion of your life maxed out and have no better need for the money.
William104
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Re: What to do with my underwater house, sink or swim?

Post by William104 »

Don't put too much weight on Zillows estimate in your decision making. It's notoriously inaccurate. Get a realtor or two to come by and give you a proper valuation on your home. You may be surprised and it could change how you look at your current situation.
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Bengineer
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Re: What to do with my underwater house, sink or swim?

Post by Bengineer »

William104 wrote:Don't put too much weight on Zillows estimate in your decision making. ...
And/or do your own homework on recent sales near you, comparing them to your own home.

If you want to stay, refi-ing to a 15 or 30y fixed mortgage would cut your interest costs if your cash flow supports it.
curmudgeon
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Re: What to do with my underwater house, sink or swim?

Post by curmudgeon »

Key question is whether you can come up with the cash to get into a conventional mortgage. At least it sounds like it wasn't a negative amortization loan, but it is definitely still a challenge. IF you can come up with enough cash to do a refi (not just 10% or 20% "down", but also enough to cover the underwater amount), then that would start saving you 3% or more on your mortgage interest - serious money. This would be my preferred option.

Zillow estimates can be fairly good for standard tract houses in subdivisions; not so great otherwise. I don't put much weight on them.

Depending on state laws and various other terms, if you tried to walk away from the underwater loan, you might find that in addition to trashing your credit for the next five years or more, you would also find the lender could keep coming after you for the difference (i.e. "recourse") in various ways.
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jimb_fromATL
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Re: What to do with my underwater house, sink or swim?

Post by jimb_fromATL »

How much do you have in liquid assets to pay down in order to refinance?

It would be great if you were a candidate for a HARP loan but I kind of doubt that a 15 year interest-only mortgage is owned by Fannie or Freddie.

If you can come up with enough cash to pay it down so the new mortgage would be no more than about 97% or 95% of the current appraised value, plus perhaps 1.5% of that toward closing costs, you could get an FHA loan. You could typically get a conventional loan with PMI if you can pay it down to 90% of the current appraised price. Even better to get a conventional loan if you can pay the balance down to only 80% of whatever the current appraised value turns out to be and pay no PMI.

Even with the MIP (Mortgage Insurance Premium) up front and per month for an FHA loan, or PMI (Private Mortgage Insurance) on a conventional loan with more than 80% LTV (Loan To Value) ratio, for the same payment as the old loan when it goes up to the amortized payment, you could probably pay the home off faster and save a lot of money in the long run. The effective mortgage rate even with PMI or MIP will be a lot less than you have now.

Given some details about how much you can pay down now, we can do a comparison.

There are some circumstances where paying less down and paying a bit more interest on a new mortgage for a longer time with a lower payment, and even adding PMI/MIP could make financial sense. That would be if you are at least a step or two above the bottom tax bracket and the lower payment would be necessary for you to be able to max out any available tax-deferred retirement plans, such as a 401(k) and IRAs. You can earn more compound interest over a lifetime by deferring taxes and investing as much as possible as soon as you can than the extra after-tax money will save on the mortgage.

How much do you have to spare at the end of the month after paying all the bills?

What are your top tax brackets for federal and state?

Are you contributing the maximum allowed -- or at least 15% to 20% of your income to any available tax-deferred and tax-advantaged retirement plans such as 401(k), 403(b), IRAs, etc?
.

jimb
jjface
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Re: What to do with my underwater house, sink or swim?

Post by jjface »

You have to realize that things are different since you have an interest only mortgage. I think quite a number of people if they had interest only mortgages would be underwater but with their repayment mortgages they are not. With a $270k mortgage at 6.5% you'd pay $17,550 a year in interest vs if you took out a repayment mortgage with the same rate you'd be paying $20,500 with declining interest payments and increasing principal payments. The point being that 12 years later a repayment mortgage would be paid down to about $215,000 and so you wouldn't be underwater - you'd be about $30k over.

But why would this be important - well because you would have been able to save the extra $20,500-$17,550 a year and invested it since you have lower payments. Really you should have been doing this if you had an interest only mortgage anyway. Invested 60:40 and that would be $55,000 today rising to $60,000 if you were 100% stocks. So if you sell your house for $245,000-270,000 =$25,000 then add the +$55000 you'd still be up $30k. You are still in a better position than you thought.

Now if you didn't save the extra separately which you probably didn't - it would still apply as you wouldn't have been able to save as much in your retirement accounts over the years otherwise. So it still matters.

Just trying to make you feel better about losing money on your house.

The decision really is about whether you want to stay or not. If you want to stay then remortgage and get that rate down to something reasonable and pick a repayment mortgage this time. Probably a 15 year one.

If you want to move then sell and don't worry - you aren't as bad off as you think. The price has only gone down a bit now and versus renting you probably came out ahead.
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playtothebeat
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Re: What to do with my underwater house, sink or swim?

Post by playtothebeat »

My wife was in basically the same situation. Bought a house in 2004 or 2005, I/O first and second mortgage. Market tanked. House was vastly upside down. Ocwen had our 1st. They were a nightmare to deal with, in my experience.

Her and I got married 3 years ago, and last year we decided to refi. By then the house was at about 100% loan-to-value, and we had to get it down to 90% to refi into a traditional 30 year fixed mortgage. Cost us about $65k out of pocket, but ultimately we decided it was worth it. Though to her, this 30 year mortgage now might feel like a 40 year mortgage, given the 10 or so years of I/O payments up to the point of the refi, she luckily doesn't think of it that way and just looks at it as her paying rent for many years before buying. She/we love the location, so it was an easy decision to want to stay here.

Good luck.. If you like the location and the house, put the money in and refi.
Carefreeap
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Re: What to do with my underwater house, sink or swim?

Post by Carefreeap »

joebh wrote:
rich251076 wrote:My questions is, does it make better financial sense to:
#1Refinance with a chunk down into a real 10-15 yr fixed rate 3-4% interest mortgage and focus firing on paying it off?
#2Carry on with my interest only and pay the principal payments when it ticks over?
#3Get out and do a deed in lieu, shortsale or something else?
#4Other?
#4Other

Refinance into a real 30-year fixed rate mortgage.

Don't worry about trying to pay it off early, unless you have every other financial portion of your life maxed out and have no better need for the money.
+1
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mickroark
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Re: What to do with my underwater house, sink or swim?

Post by mickroark »

Zillow estimates are usually 20% to 25% high in our area. You should see what's selling and at what price in your neighborhood from a realtor.
Tal-
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Re: What to do with my underwater house, sink or swim?

Post by Tal- »

joebh wrote:
rich251076 wrote:My questions is, does it make better financial sense to:
#1Refinance with a chunk down into a real 10-15 yr fixed rate 3-4% interest mortgage and focus firing on paying it off?
#2Carry on with my interest only and pay the principal payments when it ticks over?
#3Get out and do a deed in lieu, shortsale or something else?
#4Other?
#4Other

Refinance into a real 30-year fixed rate mortgage.

Don't worry about trying to pay it off early, unless you have every other financial portion of your life maxed out and have no better need for the money.
Echoed.
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Meaty
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Re: What to do with my underwater house, sink or swim?

Post by Meaty »

rich251076 wrote:Before anyone lamb bastes me on my decision I have to say my wife and I were very uneducated first time buyers back in 2004, so here goes.

2004 we bought a house no money down, 270k 30 year mortgage 6.3% interest only first 15 years. Now owned by Ocwen after GMAC went belly up.

House price dropped to 190k there after and has slowly been creeping back (probably with inflation?) to 245k today - Zillow estimate.

Being good drones we've kept up with our monthly payments and 12 years laters and we are at a point where we earn substantially more and have begun to screw our heads on financially (we both comes from families with no financial education and debt was a norm).

The house is a 2 bedroom ranch, good neighborhood on 0.7 acres of land, its a nice piece of property and we have been comfortable raising our family there. But we still owe the principle.

My questions is, does it make better financial sense to:
#1Refinance with a chunk down into a real 10-15 yr fixed rate 3-4% interest mortgage and focus firing on paying it off?
#2Carry on with my interest only and pay the principal payments when it ticks over?
#3Get out and do a deed in lieu, shortsale or something else?
#4Other?

I am usually earned to much to do any kind of refinancing programs offered up to now.

Admittedly we have been Ostriches with our heads in the sand up to now but I am at an end and would like to sort out our finances and look toward having at least something.

Thanks
#4 - do a harp refi to 3-4% without having to pay down the balance
"Discipline equals Freedom" - Jocko Willink
freebeer
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Re: What to do with my underwater house, sink or swim?

Post by freebeer »

You also have (per another post) $20K in credit card debt so if you combine that with the estimated $25K in negative equity you are at least $45K under water in total. That also means you are unlikely to get a good-rate conventional 30-year loan since you won't have the necessary down payment.

Because of this big picture my advice is the opposite of most others who've responded.

It may be sound like tough medicine but if you can rent at a reasonable price in your preferred area I would recommend you investigate walking away from the home to accelerate your paying off your consumer debt and building a nice cushion of savings and some investments, and maybe looking at buying another home in 5 years or so - 20% down plus a six-figure brokerage account should count a lot in your securing a mortgage then to offset a credit disaster now, and there are lots of people still unwinding under water homes from the last boom so you won't be unique. Are you in a recourse or a no-recourse state? If the only impact of walking away would be damaged credit, well it seems like the last thing you need right now is to have more credit extended to you. Bankruptcy may be another option, since your 401Ks and similar accounts would likely be shielded.
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TimeRunner
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Re: What to do with my underwater house, sink or swim?

Post by TimeRunner »

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madbrain
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Re: What to do with my underwater house, sink or swim?

Post by madbrain »

Seems like you have already made the decision by keeping up the payments all these years despite being underwater on the loan. Why the change of heart now ?

Is this loan a recourse loan or not ? This depends on your state laws, but also on your specific loan. For example, in California, purchase loans are non-recourse, but refinance loans are recourse loans.

I echo the sentiment to get proper appraisals from realtors. Don't assume the Zillow price is correct. The only way to find the true price is to try to sell it, though, but that's difficult when you are underwater.

You didn't state your loan balance. You said the loan was interest-only, but those loans also allow prepayments. I assume you didn't do that. Can you confirm that your current loan balance is still $270k ?

Assuming the home value is really $245k, and loan balance is $270k, it means you are only about 9% underwater. Even if the loan is non-recourse and you could give the keys back to the bank without having to fork any money, does it really make sense to do so for only a $25k paper loss ?
The time to try to negotiate a refi or short sale with the lender was when the paper loss was a lot larger, IMO. You don't have as much leverage now.

Best possible case if you don't have to realize that loss is :
a) loan is non-recourse
b) you qualify to buy a second home with your higher income, and do so
c) you stop making payments on the first house
d) then either let the lender foreclose, which will damage your credit significantly; or you manage to do a short-sale, which will damage your credit a little less, but you will have to chip in a little bit. Either way, you will end up with a tax bill from any amount of debt that the lender ends up forgiving.

Seems like a lot of trouble, and you are forced to move, which is not free. And if the loan is recourse, none of that is possible.

If it is a recourse loan, then look at possible refinancing options. Refinancing is much more difficult for an underwater loan. You may have to pay down the loan to 80% LTV worst case. It may still be worth doing, given the high interest rate you are paying now.
daveatca
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Underwater, maybe

Post by daveatca »

Zestimates are crap. $245K means $200-280K. Maybe. Just ignore it. Have a real estate agent do a CMA.
Topic Author
rich251076
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Re: What to do with my underwater house, sink or swim?

Post by rich251076 »

Thank you all for the great advice.

I will get a proper appraisal.

We are in a position at the moment where I can afford to save a down payment quickly with some strong budgeting and we do love our house so we will most likely stay put.

I'm wondering if being so far in on the interest only loan is advantageous after so long vs refinancing. How do I figure that out amortization tables.

Sadly we have not been financially literate up to now, even being reasonably intelligent folks I guess it's where you focus.

That's not the worst of it. We have no savings, about 20k debt and presently zero plans for retirement, I also turn 40 next month.

Well I guess it's never to late to do something, I might not end up with much, but hey have a go. I'll sort the debt and the mortgage out I'm least worried about those now I have a path. I'm more concerned about whether retirement is unattainable right now. I should start a blog ;)

Thanks all, great advice, super good people here.
madbrain
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Re: What to do with my underwater house, sink or swim?

Post by madbrain »

[quote="rich251076"
I'm wondering if being so far in on the interest only loan is advantageous after so long vs refinancing. How do I figure that out amortization tables.
[/quote]

The interest-only loan is the reason you got in over your head. It allowed you to get a lower monthly payment, but you didn't build any equity in 12 years ! This is why you are unable to refinance today. If you had made any principal payments at all, you would be able to refinance on much more favorable terms now.

6.3% interest rate is outrageous today - nearly twice the prevailing rate on 30yr fixed. You can't keep paying that interest rate and expect to get ahead.

All of the interest you have paid so far on your interest-only loan is now water under the bridge; it's as good as having paid rent, except that it has a better tax treatment. You are in no better financial position than on the day you got the loan; actually, worse.

What happens at the end of the 15 years (ie. 2019) if you still don't make any principal payment ? Do you have a balloon payment where you are forced to refinance ? If the loan is still underwater, and you can't put any money down to refinance (cash in refinance), then the bank will likely just foreclose on your home.

As far as loan amortization tables, head to
http://www.bankrate.com/calculators/mor ... lator.aspx

There is no amortization on interest-only loan, by definition.
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Artsdoctor
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Re: What to do with my underwater house, sink or swim?

Post by Artsdoctor »

You are in some trouble here. Off the cuff, it doesn't sound like you can afford the house or much of anything. You've been living beyond your means. So let's pick it apart:

1. You have no savings--meaning, there is no emergency fund.
2. You have $20,000 in credit card debt.
3. You have a 30-year mortgage which you took in 2004; you're paying interest only, the rate is 6.3%, and it'll be recalculated in 2019.
4. To the best of your knowledge, you have no equity in your house but you can't be sure. There is a high likelihood that your mortgage balance is greater than the worth of the house.

The good news is that you say you can earn "substantially more."

Others can chime in here, but you have no reserve and that should be your first priority. You're on thin ice to begin with so if something were to happen, you'd have nothing to fall back on. You need an emergency account now.

Once you get some sort of basic emergency reserve, you have to pay off the credit card debt. The mortgage rate is bad enough, but the credit card rate has got to be killing you. You're going to have to get the balance paid off as soon as is reasonable. I would put the credit cards aside, give them to a trusted family member, or whatever it takes, but don't use them; you've already abused them.

During this process, you can try to get a sense of what your house is worth. Perhaps you'll be pleasantly surprised but I don't know how you'd be able to refinance if your house is worth less than the loan--the bank's going to want it's money. However, if the worth is substantially more than you think, perhaps you can work with the bank. You mentioned that you'd consider refinancing with a chunk down--but where's this chunk going to come from?

If you truly can save like crazy, then that gives you some flexibility. As it stands right now, you can't afford to sell the house (you'd have to bring money to closing that you don't have).

You should protect your credit if you can. Going down the bankruptcy path may ultimately be your only option, but if you do it right, you could dig yourself out of this.

Regarding retirement savings, that's tough. You are so far in the hole right now that it might seem impossible to imagine retirement savings. The only thing I'd say is that if you have an employer match in your retirement plan, try to go for it since it's essentially 100% return on your money. But you won't be able to do much more for now until you get the above taken care of.
Last edited by Artsdoctor on Tue Aug 30, 2016 8:52 pm, edited 1 time in total.
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TimeRunner
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Re: What to do with my underwater house, sink or swim?

Post by TimeRunner »

Artsdoctor just gave you a $400 financial consultation for free. Take the advice! :beer
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therub
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Re: What to do with my underwater house, sink or swim?

Post by therub »

My biggest piece of advice is to check out Dave Ramsey - his radio show/podcast, books, classes and materials are designed for you and are very motivational. Once you get to baby step 4 come back and see us for investing advice.

A few other thoughts:
- Don't pay for an appraisal; realtors will do a comparative market analysis for free. If you end up refinancing, you'll have to pay for an appraisal then.
- Call your mortgage company, be persistent but polite, and find out if you can do a HARP refinance or similar. If you are under water, your best options are going to be through your existing mortgage company. You should do that tomorrow.
- You really should think about a 15 year mortgage if you can afford it... I hate to see you resetting the clock on a 30 year mortgage. With current interest rates, your payment should be similar if not lower than what you currently pay in only interest. The only issue is what your mortgage company will do for you if indeed you are under water.
Fees are the rub.
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sunny_socal
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Re: What to do with my underwater house, sink or swim?

Post by sunny_socal »

Do you have any extra cars or new cars? From time to time we see threads where someone went and bought a brand new truck even though it wasn't the best idea. If that happens to include you, then at least you have something to sell to offset the short term debt. Get yourself into one of those $5k camrys or accords and go from there.

I would:
- Refi the house, Don't go back to an interest-only loan
- Sell enough 'stuff' to pay off the credit card (you must have created that debt somehow!)
- Save up some cash
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rich251076
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Re: What to do with my underwater house, sink or swim?

Post by rich251076 »

Again thank you for the feedback, it has helped a few things make sense.

I think the plan will be:

Trade in the one vehicle we have a loan for - its a trick worth 27k, we now owe 17k, we'll put the 10k into a used card.
Pay off CC debt between here and tax return time.
Save emergency fund, from what I am reading around here 6 months of expenses.
Get a real estate agent to estimate the current value of the home.
Save down payment for new mortgage and refi.

Maybe after that I can save a little something for retirement. My income is presently good so I have something to work with today. We have clamped down on a tight budget and have begun bailing out.

Thanks All.
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Artsdoctor
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Re: What to do with my underwater house, sink or swim?

Post by Artsdoctor »

^ And don't forget to at least look into a HARP refinance:

http://www.harp.gov/
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unclescrooge
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Re: What to do with my underwater house, sink or swim?

Post by unclescrooge »

Have you requested your current lender for a loan modification?

You may be able to knock off 2% and get into a 30 year loan without coming up with any money.
orca91
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Re: What to do with my underwater house, sink or swim?

Post by orca91 »

rich251076 wrote:Again thank you for the feedback, it has helped a few things make sense.

I think the plan will be:

Trade in the one vehicle we have a loan for - its a trick worth 27k, we now owe 17k, we'll put the 10k into a used card.
Pay off CC debt between here and tax return time.
Save emergency fund, from what I am reading around here 6 months of expenses.
Get a real estate agent to estimate the current value of the home.
Save down payment for new mortgage and refi.

Maybe after that I can save a little something for retirement. My income is presently good so I have something to work with today. We have clamped down on a tight budget and have begun bailing out.

Thanks All.
Sounds like a reasonable and good plan. Sounds like you will be fine. Good luck!
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