My name is Terry and I have a 3 yr ARM mortgage

TerryBPP · 09-10-2007, 11:05 AM

Yes, I am one of the millions that did a short term mortgage in plans to not stay in my house for very long. Of course, I am in for the duration.

Luckily its doesn't go variable until August 2008 and cannot go above 7.00% until August 2009. It goes to 2.75% + prime variable after that which could be scary.

But in preparation I decided to call a referred broker to see what my options are (my original broker has gone bankrupt). My options.......virtually nil.

Property values in my neighbor hood have dropped 10% and banks will now only finance 90% of the home value (they use to go up to 125%). So I will have to pay off 20% of the house to refi. Thats pretty sporty but an option after August 09.

The broker suggested I hold off for a year. I can hold off for 2 without to much financial direst. Hopefully property values raise 5%.

Not worried in the least bit because I can always pay off $20-30k and e able to refi but it would eat up a huge chunk of my savings.

Now I see why people that got the ARM because they couldn't afford a conventional mortgage would be in deep *****.

Porsche-O-Phile · Porsche-O-Phile's Garage

Or you can simply sell at a slight loss now and be rid of the mess. As unappealing as that might sound, it might be in your best interest.

I'm not 100% certain, but you might be able to write off the loss also. Someone with better knowledge of tax laws can probably chime in here.

TerryBPP · 09-10-2007, 11:17 AM

I like the house and would prefer to keep it for now. Like I said it not a emergency financially but I now see why there are tons of foreclosures.

If I did sell it I would break even. I made $65k from the condo I sold and minus down payment and the loss I would take I would be back at zero. Not the worst story I've heard about real estate.

legion · 09-10-2007, 11:18 AM

If he sells at a loss, he still has to cover the difference between the sales price and the loan amount. Really no better than refinancing now, and then he doesn't have a place to live...

Porsche-O-Phile · Porsche-O-Phile's Garage

Makes sense. As long as you're paying meaningful amounts into the principal you should be reasonably okay. In reality you'll probably end up eating it at the refi time, but at least you can spread the loss out over time and make it a bit more palatable.

GDSOB · GDSOB's Garage

Start making the payments at the higher rate now. By the time it adjusts, you should have significant equity to allow for the refi at the going rate. 2 years more years of paydown + appreciation.

Quote:

I'm not 100% certain, but you might be able to write off the loss also. Someone with better knowledge of tax laws can probably chime in here.

Since the gains from selling a residence are not taxable (within reason), neither are the losses.

grudk · 09-10-2007, 11:46 AM

Terry, you are speculating that prices have bottomed and may go up. Have you considered that prices may be coming down MORE? In two years, the value could be down significantly, in which case you would have to pitch in even more to refi.

Very, very unlikely to see a rebound in home values within the next two years, IMO

If you can sell now, consider it. If you are determined to ride out the storm, I think a refi sooner rather than later should be considered.

You are far from alone in this problem. And that suggest prices will continue to decline

legion · 09-10-2007, 11:46 AM

Quote:

Originally Posted by GDSOB

Start making the payments at the higher rate now. By the time it adjusts, you should have significant equity to allow for the refi at the going rate. 2 years more years of paydown + appreciation.

Since the gains from selling a residence are not taxable (within reason), neither are the losses.

Now that's a GOOD IDEA.

+1000

Rick Lee · Rick Lee's Garage

I sort of dodged a bullet, in that I was positive I would not stay in this house for three yrs., but happened to get a 5/1 ARM for the same price as a 3/1, so I took that. Now I'm coming up on two yrs. and 11 mos. and ain't gonna sell. I'm moving, but can't be bothered with the selling/realtor/waiting game and Jan. ain't the best time to sell a house anyway. I'll rent it out for about $200 positive cash flow per month and ride it out until either the market picks way up or the ARM adjusts to a point where I just can't take it anymore. Not all ARM's go up and even if they do, they don't always even reach their adj. cap. I wouldn't panic just yet.

TerryBPP · 09-10-2007, 12:05 PM

Rick,
Renting at a loss would be better for me. Losing a few hundred a month but still retaining the property would be the best of a worst case scenario.

Grudk,
Property sales in my area are already increasing due to the lower prices. If they keep dropping I'll keep paying.

Rick Lee · Rick Lee's Garage

Renting at a loss could be very good for you. Isn't that loss tax deductible?

sammyg2 · 09-10-2007, 01:16 PM

Plus depreciation of the building over 26 years IIRC.
The land can appreciate but according to the IRS the value of the building structure goes down and you can claim that over time. Plus every single dollar you spend at home despot or where ever for the rental gets written off. I used to have a townhouse that I was renting out for negative $300 a month. It was upside down after the drop in prices in the early 1990s. When I finally sold it I discovered I had slightly less income after I eliminated the loss as my taxes went up more than the $300 a month. Of course that is dependent on your tax bracket.

daepp · 09-10-2007, 01:22 PM

I don't think the loss is deducible - your yearly losses are aggragated and used to offset any gain on sale.

onewhippedpuppy · 09-10-2007, 02:37 PM

Terry, are you the DIY type? If you can remodel and build that 20% in equity (instead of cash), you should be able to refinance.

To explain, say you totally remodel the house, and have it appraised by an independent appraiser. Most of the time, any loan values will be based upon the appraisal, as you're typically dealing with a national bank that does not have their own appraisers. If your home appraises high enough, you essentially get 20% in equity (sweat equity). Even though you're borrowing 100% of your purchase price (or close to it), the extra equity is like a virtual down payment. Also, you get off of the hook for PMI. Just a thought.

lendaddy · 09-10-2007, 02:44 PM

Just grease the appraiser and be done with it.

TerryBPP · 09-10-2007, 03:16 PM

Quote:

Originally Posted by onewhippedpuppy

Terry, are you the DIY type? If you can remodel and build that 20% in equity (instead of cash), you should be able to refinance.

To explain, say you totally remodel the house, and have it appraised by an independent appraiser. Most of the time, any loan values will be based upon the appraisal, as you're typically dealing with a national bank that does not have their own appraisers. If your home appraises high enough, you essentially get 20% in equity (sweat equity). Even though you're borrowing 100% of your purchase price (or close to it), the extra equity is like a virtual down payment. Also, you get off of the hook for PMI. Just a thought.

House was completely remodeled except the bathroom (which we are doing now) when we bought it. Aside from adding a pool its top of the line.

"Just grease the appraiser and be done with it."

Plan B. I know a loan officer at a bank we do projects for that said he could work something out if worse comes to worse.

Porsche-O-Phile · Porsche-O-Phile's Garage

A "loan officer" likely won't have the kind of pull to help in the kind of situation that's likely to unfold in the coming months.

Your best strategy is to pay enough into principal so you can offset the loss you're likely to have to sell at.

The people that are going to get slaughtered are the ones that did I/O ARMs. Remember that "I/O" means "no equity".

Rick Lee · Rick Lee's Garage

I have an I/O ARM and am doing just fine with it. I put 20% down and my place is still worth well above what I paid for it. It has come down from its peak. But it's just fine. 100% financing on I/O would be a different story.

lendaddy · 09-10-2007, 03:56 PM

Quote:

Originally Posted by Porsche-O-Phile

A "loan officer" likely won't have the kind of pull to help in the kind of situation that's likely to unfold in the coming months.

Sure they do. In fact with a volatile market it will be easy to "miss one" by 5-10%. The appraisers will help out their favorite loan officers from time to time and this one sounds close anyway.

Not saying you should or shouldn't, just that you can if you want to.

Porsche-O-Phile · Porsche-O-Phile's Garage

I dunno. A lot of "loan officers" are probably going to end up out of work in the coming months. I suspect the market is going to drop a lot more than 5-10% too. Rick - you're probably covered since you did 20% down, but you may very well lose that 20%, possibly even a little more if you're unable to re-fi. A lot depends on market, but I wouldn't be at all surprised to see things drop 25%-30% nationwide before this is all over; I suspect certain volatile markets (like this one) to drop significantly more - north of 40%.