Just sent off a wad of paper to the loan officers at the credit union. My favorite spy there tells me that because I’ve been laid off my job, we have a shot at getting our mortgage payments reduced, at least for a while.
I’ve asked to have the principal cut, since the so-called “investment” house is now worth about $50,000 or $60,000 less than we owe on it. What a flicking fiasco!
What We’re Hoping For
Of course, they’re not going to do that. The credit union’s loan officer says they have been cutting the interest rate by reamortizing the loan over 40 years. This is a temporary arrangement, lasting at most two years. After the period is over, the customer may be given an opportunity to refinance, or simply to allow the rate to revert to what it was, with no detriment to credit rating.
Because the credit union has never been involved in federal loan programs, this is a private loan modification, not part of a government stimulus plan.
Rates are at 5.09 percent today, and so, since our rate is already down to 5.3 percent, I’m afraid this wouldn’t make much difference for us. However, if the loan were reamortized over 40 years, then our mortgage payment would drop by $141 a month for the next year or two. That would help a little. Not much, but some.
I’ve also asked them to change the terms from 30/15 to a straight traditional 30-year mortgage without zinging us for refinance costs. In a 30/15 mortgage, your payments are based on amortization over 30 years, but the payment comes due in 15 years. If you haven’t sold the house by then, you have to refinance. Because we thought we would own the house for five or at most ten years, this looked like a pretty good deal at the time.
Now, though, it’s beginning to appear that the house will not regain in its value in the 12 or 13 years remaining to run on the 15-year part of the present mortgage. And if history repeats itself, in another decade you can be sure that interest rates will be through the roof. Even if we have paid down the principal some, we could end up with payments that are no less than what we’re paying now, which is WAY too much.
If the property value has not risen significantly after the initial 15 years ends, we’ll have to bring cash to the table to keep from losing the house, since we will not be able to refinance it at that time unless we add a chunk of money to the equity. And because I will never get another full-time job at my age, we will simply not have the cash to do that. Effectively, we will have been paying rent on that house at a rate far above the going rental rate in that neighborhood.
Nightmarish
M’hijito is feeling trapped. He’d thought we would be in a position to sell in five years, given that the market seemed to be at or near its lowest point at the time we bought. Because we failed to recognize that real estate was in free fall, we completely misjudged the actual value of the house, and now, along with 25 percent of the other mortgage payers in this state, we are nailed into an investment that is worth nothing like what we bargained for. Because you don’t realize a loss until you sell, we’re hanging on and hoping values will turn around. But realistically: it’s going to take a long, long time to break even on that place, and we certainly will never make a profit.
Meanwhile, he would like to go to graduate school (can’t, as long as he has to make that mortgage payment) and he would like to go back to San Francisco (can’t, as long as we have an albatross tied around our necks). Because we can’t rent the house for what we’re paying on it, our options are very limited.
What Else Can We Do?
There’s really only one option if he wants or needs to leave: I sell my house, use the proceeds to pay off the mortgage on that house, and move in there.
It’s a pretty little house, and the truth is, it’s a better size for me. It has no pool, so that would be one fewer cost and lots less work. It’s more centrally located—within walking distance (sort of) of the light rail line and my favorite upscale grocer (where I no longer can afford to shop…).
On the other hand, the summer utility bills are much higher than mine, and the neighborhood is not the best. Although my neighborhood also has some dangerous slums nearby, it at least doesn’t have a Walmart around the corner jacking up the crime rates, and I do have a very pleasant park less than two blocks from the front door.
Really, in terms of living conditions it probably would be a toss-up. I certainly could stand to live there. If that’s what we have to do to make it possible for him to get on to the next stage of his life, the world won’t end.
Could you rent your house for a better price? Move into his?
I think it would be very risky to rent my house, with its unfenced pool. Installing new fencing would be cost-prohibitive. Even if it were rented to someone without kids, all it would take is a relative or a friend to let a kid fall in the drink for me to face a gigantic lawsuit.
Also, very probably the rent on my house also would not cover the mortgage on the downtown house. If we’re going to try to hang onto both places, we’d be better off (if he wants to move on) to rent that place for whatever we can get, and then carry the amount of the mortgage that the rent won’t cover as a deductible loss. We can get away with the for three years, I think; after that we’d have to sell, try to get enough rent to make a few dollars’ profit, or figure out some new strategy.
If you sold your house and moved into the other one, would that improve your financial picture? In other words, would selling your house and moving into the other one only be beneficial to him? Would you consider doing it if his difficulties weren’t part of the picture?
@ SimplyForties: It wouldn’t help him at all: it would put him out on the street. He’d have to go back to a rental, and for what he can afford, he’d end up in another third-world dump.
Financially, it would be a nice little windfall for me: after the various realtor and tax gouges, I’d probably pocket 20 or 30 grand on the deal, because my house is now worth about $40,000 to $50,000 more than his.
He says he likes the house — and well he should, because it is a charmer. The issue is whether he wants to stay there long enough to get us right-side up again (if anyone ever gets right-side up again). And as long as I keep my side of the bargain, he can afford to live there.
If he doesn’t go to grad school elsewhere, would he go someplace here? And what kind of financing options for school would he have?
It seems like, given the problematic money situation, it would be smart to get him as much education as possible to increase his earning potential. (Though I suppose that’s assuming, since I don’t know what field he’s in and so whether it would mean much of a wage no matter the level of education.)
Of course, if he gets only loans for grad school, that would make it his situation worse for a few years. Does he have an estimate on how much grad school would help his earning potential?
Also, while I know your son will want to start a life, but 15 years is a long time to save up for a chunk-down payment on the house. In the meantime, with inflation, rents will continue to rise, so it may one day work out to where rental rates keep up with your mortgage payments. (Or maybe not, I’m new to the area, so I don’t know exactly how much rents rise here over time. In Seattle, it’s pretty steady.)
Meanwhile, you could write the whole thing off as a failed investment attempt and simply sell the house sometimes in the next couple of years, as the economy improves. You said you have about paid down the principal on the house to what you might get. While it would be nice to see a profit, the money is already gone. You’re not counting on it anymore. And how much more comfortably could you live without this hanging over your head? Meanwhile, your son could go off to school and get started on his life.
Arguably, as you said, you can at least make $20,000-30,000, which I suppose is a better scenario. But not for a house you don’t want to be in. At least, one that’s not in an area you feel comfortable in.
Finally, if you did sell your house, couldn’t your son live with you for a few months, until he gets accepted to grad school? Wouldn’t be great, but it would make more sense than him paying rental rates.
Sorry I must have misunderstood. I thought you were saying you were thinking about selling your house and moving into the investment house in order to free him up to move away, which I took to mean you were only considering it in order to benefit him.
@ SimplyForties: Really, if it would benefit him, I would do it in an instant, especially since it would do me no real harm.
@ Abigail: good thoughts, one and all.
Rents here rise and fall according to the law of supply and demand. When most people can get into houses, rents drop; when a lot of people can’t afford to buy houses, rents rise. When rental properties are overbuilt, rents drop…and so on to infinity.
Phoenix, like most Southwestern burgs, has a boom-&-bust economy. You may starve for a few years, but then another bubble comes along (we call ’em booms) and by golly, if you’ve been smart about your pennies during the bust, you make a ton of money.
That’s why I think if we can hang onto this place for a few years, we’ll come out more than all all right.
Arizona property values rise along transportation corridors. People move here from areas where an hour-long commute seems normal and two- and three-hour commutes are not out of the ordinary, and so a ticky-tacky elbow-to-elbow suburb 45 minutes (when there’s no traffic jam) from mid-town looks like heaven. But there are always buyers who abhor the thought of driving upwards of 45 minutes each way to the far-flung stick-and-Styrofoam suburbs, and so that’s why certain in-town areas are vulnerable to gentrification and absurd price inflation.
This is a potential such neighborhood: the houses are sweet (“character”!!!). Construction is 1950s solid brick in two linked courses with an air space between them (unheard of!). In Arizona, a 50-year-old structure is considered
“historic” (tax break!!!!!). It’s a block away from a very upscale North Central lawyer’s & doctor’s ghetto (million-dollar homes!!!!). And if you are a young lawyer or a budding downtown financier or start-up business exec who has yet to purchase the Mercedes and hire the chauffeur, the train, which comes within walking distance, will take you to your office in 15 minutes. If you work in downtown Tempe or at ASU, it will get you to work in about 40 or 45 minutes, in “leave the driving to us” mode.
If the City Parents ever wake up and get a grip on the blight west of 15th Avenue, this will be a very valuable piece of property, indeed. That valuebleness would’ve come a great deal sooner without the Crash of the Bush Economy (oh, God, how I love to annoy the righties with that! ;-)), but I suspect it will come about anyway over the next ten to fifteen years. I think the inevitably escalating price of gas, the endlessly ballyhooed train, and the repeated spectacle of all those stucco-and-Styrofoam shacks self-immolating whenever a lamp falls over will lead to a great demand for middle-class neighborhoods of solidly built structures in town.
It’s just a matter of hanging on. And playing it as it lays.
Why is there such a difference in the utility bills? Depending on why, you could do energy upgrades or sometimes the utilities will do it, especially because you’ll be low-income, since you are unemployed/retired.
@ Linda: I won’t be considered low-income because of the amount in savings. In Arizona, it’s not cash flow: it’s aggregate assets. If you own anything of value, including your home, your car, or an IRA, you’re not low-income. If you have divested yourself of assets within the past 18 months or two years (as, for example, by gifting your children or donating to charity), you’re not low-income.
The difference in power bills has to do with the difference in power companies. My house is in the Salt River Project; M’hijito’s is served by Arizona Public service.
Some years ago, APS decided to invest in a nuclear power plant. That white elephant pushed all its customers’ power bills up, tho’ at the outset APS bills were already higher than SRP’s.
SRP is in the process of trying to get some large rate increases approved; sooner or later SRP bills will be as high as APS’s. But for the nonce, they’re still significantly lower.
It’s interesting that folks don’t bat an eye when their 401k investments tumble $50-60,000 but a real estate deal that heads south can be a bit unnerving. Any investment can be gamble, you win some, you lose some. Bite the bullet and move on.
I wish you luck!
@ Leah: Now that is an interesting comment.
Personally, I can’t say I didn’t bat an eye at losing $180,000 from my investments (hence tart turns of phrase like “the fall of the Bush economy”…). However, you are right that the extreme loss in value in the real estate investment seems more disturbing somehow.
I think it’s because we’re stuck with the house. Losing money in a mutual fund doesn’t leave you chained to a place. As long as you can scrape together the cost of a Greyhound ticket, you can at least move on. And also, a mutual fund or stock market investment doesn’t entail hundreds of thousands of dollars in debt.
But being in debt up to your schnozz for a house that you can’t sell or rent for what you owe on it? That means you’re physically trapped. You can’t move on. You can’t leave town to get a better job, you can’t quit your job to go back to school: all you can do is keep trudging along in your present miserable job, with no hope of escape.
Well, yeah: you could escape. You could be laid off. If you lose your job, then you will lose the roof over your head as well as the tens of thousands of dollars you’ve already invested in worthless equity, and then you’ll be sleeping under the oleanders. That’s an escape, of sorts.
Hmm. I think it actually IS objectively more disturbing. And I think that probably if you’re under about 45, owing more on a house than it’s worth probably is a great deal more dangerous than losing a chunk in your 401(k). At least if you have another couple of decades to work, you have a shot of regaining your equities investments.
But this house thing…frankly, I think it’s unlikely that the value of many houses in the American Southwest will return to the amounts owed on them, certainly not for another 15 or 20 years. By that time, because of inflation the real “value” of the houses will be no more than what it is today–we may be able to retrieve enough dollars by selling to pay off the vast loan, but not enough equity will remain to buy another house without going right back into just as much debt. It’s a trap.
Anyone who’s in this predicament will Never. Get. Out. Of. Debt. That is disturbing.
You’ve mentioned before that he’s been thinking about grad school … it sounds like the most likely scenario is the one you put forth in which you sell your house, move into the second one, freeing him up to move to SF and go to school? Is he ready to take the latter two steps?
I have been mulling over this. Wouldn’t rents in SF be lower than they were pre-meltdown? If so, wouldn’t the money you lose renting out the house be compensated for–sort of–in lower SF rents? Not sure how much rents may have gone down there…but it’s worth looking into.
@ Revanche: He unfortunately will be forced to go to ASU or the University of Arizona for graduate school. We can’t afford out-of-state tuition for him. His dad has remarried and not only has to support a wife but her dependent adult daughter and that woman’s grade-school child, and so he’s pretty well tapped out.
He had a good job in SF until the dot-com bust did him in. In the recession that ensued in the Bay Area during that period, he was unable to land another job. He really craves to go back to the City, but without a job, that’s out of the question. Also it’s become clear that a B.A. in political science plus $5.00 will get you a cup of coffee…no matter how fancy the private liberal arts school that bestowed said political science degree. He needs an MBA if he’s ever going to get a job that will pay him a decent wage — since he’s not the entrepreneurial type, it seems unlikely he’ll try to start a business, and even if he wanted to, it’s hard to imagine where the start-up money would come from in the present economy.
If he enrolls in a f/t MBA program and gets loans, a part-time job, or graduate funding, he should be able to pay his half of the mortgage, which when you come right down to it is about what he’d have to pay for rent in hideous downtown Tempe. This would keep him in the house for another year or 18 months, until he finishes the degree. By then with any luck the economy will be turning around, and maybe he’ll be able to get a decent job. Maybe even in the City! 🙂
I think the main thing that gives him pause is the uncertainty of the economy. Quitting a job now, even though it’s a sh**y job, is like stepping off the side of a cliff.
@ FrugalScholar: I don’t know how much rents have fallen in the City, but the base rate, pre-bubble, was very high, indeed. Even if they’ve gone back to where they were before the boom, they’re astronomical.
To give you an idea, when he was living in Oakland (before he finally managed to persuade his roommates to move across the bridge into SF proper), I explored the possibility of buying a place there (my mother grew up in SF and we returned there after we came back from Arabia…once you’ve lived in the City you always think of it as home).
The vibrant area of Oakland just below Piedmont, relatively safe and full of young professionals in their 20s and 30s plus a few affluent students, has a number of big old family houses that have been subdivided into flats. Rents for a single floor in one of these shacks defy belief. The kids were paying $2,400 for their three-bedroom segment of the place they rented; the couple downstairs paid the same amount for a basement flat that looked very much to me like a converted garage. Houses were selling for $450,000 to $650,000.
$2400 a month would have paid for a mortgage of about $400,300. I could have cleared about $210,000 on my house at the time. A $200,000 down payment would have bought me a house worth $600,000, assuming I only rented out a single flat! For $600,000 to $800,000, I undoubtedly could have found a place with more than one rentable flat. As we scribble, for example, there’s a very sweet property available in Oakland (god only knows what area–some parts of Oakland are alarming) with a front house sporting a three-bedroom and a one-bedroom flat plus a four-bedroom back house: $598,600. For $600,000, you can get a duplex with parking on the property(!!). Rents in Oakland are running from about $1,100 (hole!) to upwards of $3,000.
By comparison: We could get about $800 a month for our 1,300-sf freshly renovated and newly landscaped solid block house in a middle-class mid-town Phoenix neighborhood.