Rent or sell - underwater in home

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We purchased a home in 2005 for $276,000. We currently owe $205,000 and the value is about $190,000. We are military and have to move but plan to rent wherever we move because we will only be there for one year. If we sell, including closing costs, we will have to bring about $25,000-$30,000 to closing. The alternative is to rent it out at about a $200 loss each month or possibly more depending on the rent we can get. We cannot do a short sale because we do have about $100,000 saved outside of retirement. The thought of being a landlord is a little scary to me and I worry that if the house gets damaged or housing values go down again we could be out more than $25,000. Do you think its crazy to take that much to closing when we could rent? We did make roughly $50,000 on the house we sold in 2005 so at least we won that one.


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Well, in my humble opinion, we’ve seen the worst of falling values, and home appreciation nationally has been almost robust lately. That would point towards perhaps keeping the home. 25K to close would equate to 125 months (over 10 years!) of $200/mn losses, even without any home appreciation between now and whenever you sell. You would also be giving up any future investment income on the money you bring to closing. One option might be to retain a management company to oversee the rental. While they would take a portion of the rent, at least you wouldn’t have to deal with collection and maintenance remotely. Also possible they might be able to rent the home for more than you’re expecting (possible, not probable), which would further help financially. You ultimately will need to weigh the pros of selling (finality, lack of monthly red ink, etc) versus the cons (loss of potential appreciation, putting out large sum to sell) to make your decision. One other item you may want to mull over if your time frame for buying a future home. While rental income can offset much of the cost of the mortgage on an investment property, you likely will still have at least a paper loss, which could make qualifying for a future home loan more challenging. Lots to consider, hope this at least helps some!

Answered 10 months ago
Ted Rood
1091 6
10 months ago military wife said:
 

Thanks for your input. Another part of the equation that adds to the difficulty of renting our house is that we have an ARM that is tied to LIBOR. It has been working great so far because LIBOR has been really low. However, I’m reading that it may go up. So we could have to refinance or our mortgage could increase substantially. Any input there? Thoughts on what LIBOR is going to do?

10 months ago Ted Rood said:
 

@military wife. Hi, Yeah, as if you didn’t have enough variables, the ARM is certainly one more. Short term rates don’t look to be going up significantly until Fed is satisfied that employment and inflation are within their target range, so likely not for a year or more, but the outlook past then is far less obvious. One thing you can do is look at the ARM rider to your deed of trust (should be in the copy loan package from your last closing), or annual ARM disclosure your servicer sends you, and see what the annual adjustment cap is. For some loans it’s 2%, on others it’s 1%. Be good to know in any case what the biggest adjustment might be. Might want to ask a local realtor (assume you may have spoken with one already) about the direction of home values in your specific area. You might get enough appreciation in the next year or two to offset the potential risk of your payment increasing, and if values do go up, your rent could potentially as well. Hope that helps.

Ted

10 months ago military wife said:
 

@Ted Rood. Thank you for taking the time to answer my questions. The annual adjustment cap is 2% so that’s nice. Values are going up here, so we will more than likely rent for a year or two and make sure we check out our tenants thoroughly.


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Your best bet sound like it would be to keep the house, as Ted mentioned, seems like the worst of the housing crisis is behind us. Having said that, there are some areas of the country that are still struggling, you did not mention what area you are in so hopefully is not a chronically depressed area. What I wanted to mention is that if you are in the military, and have that ARM, you may want to talk to your lender about a loan modification. Military personnel get special perks and if you can get a fixed rate, you will sleep better at night, even if you are worried about being a landlord. By the way, you can hire a property manager to handle that part for you. Most people hear horror stories about being a landlord, that happens to people who have no clue how to screen tenants and end up renting to deadbeats. An experienced property manager can smell these people a mile away and keep them from giving you grief. Shop around for a good property manager, find one with lots of experience. Fees are not that high, usually about 6-10% of the yearly lease amount.. very well worth it. A bad tenant experience can cost you thousands of dollars, an experienced property manger can help you avoid that pitfall. Best of luck.

Answered 10 months ago

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First, I would recommend renting at a slight loss than selling at a huge loss. Property values are rising and you will soon be able to sell.

Second, I would refinance immediately. A 2% cap on the ARM may seem small until you see how it affects the payment. A 30 year mortgage on $205K at 3.5% is $920.54 where as the same loan at 5.5% jumps the payment to $1,164.

There are very attractive VA loans which are designed for the military. They can even help with underwater loans. Additionally, there are several loan modification programs designed to help underwater homes. Check with some banks and see what they have to offer.

Answered 10 months ago

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