Upside down on a mortgage

Real estate market is getting uglier each time I listen to the business news and personal financial disaster stories are floating up more and more frequently. I am sure this is not the last and not the worst yet a very educational first-hand experience from someone in an mortgage crisis situation (which I ran across at FatWallet forums).

- $410k home bought on 10/05
- 80/15/5 loan
- 80% 5/1 ARM @ 5.375% [$315k remaining]
- 15% 15yr fixed @ 7.5% [$50k remaining]
- 5% Down payment
- The House next door has been on the market at 290k for 1 month.

Unfortunately, we bought our house at a bad time, and we are now upside down. We can afford our mortgage, and I am currently paying down the 15yr fixed down as quickly as possible (an extra $600/mo). However, I’m afraid that when the 5yr ARM is up, we’ll be unable to refinance the mortgage since we are upside down by so much.

It is a while since I checked property prices in our subdivision. I am honestly afraid to do so. I am hoping however my house is still worth about what we paid 5 years ago since real estate has appreciated only about 5% annually in our area and shouldn’t fall down too fast. If however I were in the situation like above I am not so sure what my strategy would be.

On the one hand it is important to pay out the second (high interest) loan as soon as possible. One reason is to soften the effect of higher payments on the ARM that will kick in after the ARM interest resets upwards. On the other hand, the last thing you want to do in this delicate situation is run out of savings and still not be able to pull off. Choices, choices…

Source: Upside down on house (looking ahead) at FatWallet

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10 Responses to “Upside down on a mortgage”

  1. 1 Mr. Debtbeater Mar 11th, 2008 at 8:04 am

    I can totally feel the pressure. My entire story on my blog is pretty much centered around the fact that we’re upside down on our mortgage and have very little room to pay it down on time before we can refinance or lose it.

    We’re not in a panic, but we’re not far from it. We have the same decisions to make…pay the 2nd mortgage, or pay down the credit cards?

  2. 2 Alan Greenspan Mar 11th, 2008 at 7:30 pm

    Your breaking my heart with your sob story. Should I feel bad for you because you strung yourself out on debt? Not…..

  3. 3 XynamaX Mar 11th, 2008 at 9:01 pm

    Lots of blame to go around, but it all comes down to not doing due-diligence.

    People got out of hand with their mortgages and didn’t read the fine lines on the loans with “teaser rates” and adjustable rate mortgages.

    I don’t understand why he’s paying down the fixed rate loan faster. It’d make more sense to pay off the higher principal loan, if he puts enough extra principal towards it, he may be able to refinance. The 15yr fixed stays the same.


  4. 4 Yan Mar 11th, 2008 at 10:32 pm

    I am sure his ability to refinance the first loan is linked to his entire amount of debt against the house and not just the portion tied in the first loan so it would be a mistake to assume that paying off the second loan doesn’t help refinancing the first one.

    What I would probably do in his case is bargain a different arrangement now, before the deadline is upon you and you are not in position to negotiate any more.

    I hear a lot about the government advising banks to give people like this a bit of a slack. It essentially comes to banks losing some revenue at a cost of saving the business and economy. Each bank however has a different policy and you might be more lucky with some than others.

  5. 5 Mark Mar 13th, 2008 at 4:44 pm

    Many mortgage companies (at least in ATL) are offering 5.5% fixed rate. I am not sure how legit they are and what would be closing costs.

  6. 6 Diane Mar 27th, 2008 at 8:43 pm

    I bought a house 1.5 years ago and it’s upside down. I’m an emptynester and found out to my horror that this neighborhood is not safe. I want to get out and rent where I lived for 22 years…But I can’t sell. I think short sales are only for folks that are forclosing…and I’ve been late by just 1 -2 weeks. But I can’t pay my other bills or eat..or buy clothes. Any ideas on how to get out of this bad place The stress is killing me. A guy was on my roof and was taken down in my front yard.. Help…Ideas?

  7. 7 Carrie Dec 13th, 2008 at 12:41 pm

    Mr. Greenspan,

    You seem to be forgetting that 2 years ago no one could buy a reasonably priced home that was not in a ghetto or was not in disrepair. Can you blame anyone for wanting the “American Dream” like everyone else? The greedy lenders who made it impossible to buy without a non-traditional loan are the ones to blame. No one could have predicted this turn of events and for many of us we saw no other way to buy a home. Get off your highhorse. This blog is to help people caught in a bad situation looking for some honest advice. You and your snide comments have no place here.

  8. 8 melanie Feb 9th, 2009 at 2:42 am

    It is not “greedy lenders” who are at fault or home buyers who bought houses at reasonable prices until the market dropped out. (For the record, home values have not dropped since the great depression [which is where we are heading]).
    I specifically remember Greenspam urging Americans to “buy adjustable mortgages” in ‘04! NO ACCOUNTABILITY!!! And if you don’t think you are scathed, check out how your home has deflated as well as any savings/IRA accounts.
    Sheep. You all should take to the street, but rule by the gov’t through ignorance, indebtedness or fear.

  9. 9 Paul Apr 1st, 2009 at 9:00 pm

    The lending institutions who designed and engineered these “destined to fail” loan products are to blame. It’s not the millions of people who bought them. If you don’t offer the junk product, nobody would have been hurt. It’s not the loan officers fault. They simply sold what was on their platter. The lending underwriters who conjured up these products are to blame. I bought a house with a down payment, full document loan, and now am big time upside down because all the sub-prime mortgages that went belly up. Again, if the braniacs who wrote these loans couldn’t see that it was a recipe for disaster, then I don’t know who would have known. It’s their full time job to design and engineer loan products that will work. It worked alright. It gave them big time profits for the short term, while screwing millions of homeowners. If this real estate crash was due to a war, disease or other reason non related to bad loans, then people would just have to sum it up as a risk they took gone bad. This however is not the case. The lending institutions created this mess. What really ticks me off is that I have a 5/1 arm about ready to mature. All I want to do is refinance at today’s rate, but since I am upside down, my lender will not refinance. Given the situation, they should just do a loan modification at today’s rate. If they don’t, and my payment goes up significantly, they are going to be holding a note on an empty unoccupied house, and at that point I could give a rats ass about my credit. It’s a bigger problem for them than it is for me.

  10. 10 crowd with pitchforks Aug 4th, 2009 at 9:30 pm

    It’s white collar crime and the criminals are on the top down. Top that off with nearly no real consumer protection and the same crooks that caused this housing crisis are still out there, wheeling and dealing.

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