This homeowner is still paying the mortgage on a home that has lost most of its equity. Does it make more sense to take a loss and move on?
Q: In 2005, I bought my first home in Lowell, Mass., for $400,000. I borrowed $360,000 using a 4.75% 5/1 ARM and made a down payment of the remaining $40,000. I now owe the bank $328,000, but the value of my property has fallen to $350,000, wiping out most of my equity. I have moved to an apartment in Connecticut and am renting out my Massachusetts house. The rent covers 80% of my monthly mortgage payment. I have an excellent credit rating and can easily afford the current payments. But I am concerned that my 5/1 ARM will reset in October 2010 and my payments will increase. Does it make sense for me to continue to own this property, or should I sell it, take a loss and end the monthly mortgage payments?
— Shelton, Conn.
A: I can understand your nervousness, since most economists expect that the current low-interest-rate climate won't last forever. On the other hand, neither will home price declines, especially now that Congress has extended the first-time homebuyers $8,000 tax credit, and added a $6,500 credit for existing buyers, for homes that are purchased by April 30, 2010, and closed on by June 30. So I would advise that you stay the course until prices are on the upswing.
Even before the extended and expanded credit passed, First American CoreLogic was predicting that home prices nationwide would bottom out in the spring and then begin to bounce back. In Massachusetts, the mortgage database company projects that by August 2010, prices of single-family homes (not including foreclosures and short-sales) will have risen 3.97% from a year earlier. If they're correct, that means your home will be worth $363,895. That won't recoup your lost equity, but it will be a much less painful bite than you'd take right now.
According to Zillow's handy adjustable-rate mortgage calculator, you're currently paying about $1,878 a month for your mortgage. If your rate jumps 0.25% at the end of five years, your payment would rise to $1,926 in the 61st month — a difference of only $48 a month that you could pass along to your tenant when the lease is renewed.
In the meantime, as home prices recover, you will continue to pay down your mortgage, though those gains will be offset somewhat by routine maintenance and other expenses of ownership. If you decide that you want to keep the home for a few years as a long-term investment, you could, of course, refinance to a fixed-rate mortgage — but that doesn't make much sense if you're planning to sell within the next year or even two.
Consider this option: Offer the tenant a rent-to-own deal. This, I agree, is a win-win solution for both of you. The tenant gets a portion of the rent applied to the purchase, and you get a price (agreed on when you write the contract) that recoups at least some of your lost equity. Plus, you can be confident that the renter will take excellent care of your property, lessening your overall fix-up costs.
(Exerpt from original article By June Fletcher of The Wall Street Journal)