Los Angeles

[Co]

We just got the plans approved to build another bedroom & bath which will cost us approx $40,000 - we already spent $6,000 on the plans & permits.  We love our neighborhood & the house but we're thinking of backing out? the problem is that we cannot buy another house because our credit was affected when we lost an investment property that we had in AZ a couple years ago.  Any suggestions?

[Boguslaw Megiel]

Hi,

It seems you have the obvious 2 choices - stay or leave.

Here is the question - can you afford the housing payment and have money to build the addition?

If your answer is YES, then you should stay, do the addition, and enjoy your house. In the long run you should be fine. You have already spent $.

If you can't afford the housing payment, due to a hardship (loss of employment, health issues, or other catastrophic event), you can short sale the property (sell for less than you own to the bank). Your credit is affected and you want be able to buy another home for some time if you are planning financing.

Please talk to your local Ziprealty Realtor and she/he will help you with your specific situation.

[Co]

Hi and thanks for your response.  YES, we are comfortable with the payment right now, but in four years it will start going up.  We're not sure if making the addition is the smartest thing to do right now since we are upside down, but we are crunched up and need the room.  Do you suggest we let this house go and use that money for another house in the future or invest the $40,000 and stay?

[Boguslaw Megiel]

I see. Your loan will reset and starts with adjustable rate, which we expect could be much higher than today's rates.

On the other hand, from what I sense, you won't have a hardship situation to try short sale your home. The only option is to ether ask the lender for "deed in lieu of foreclosure" or foreclose. Neither is good.

If you do the above you loose your house.

Think about this:

- You won't be able to purchase another house for a long time.

- Real estate market condition at the time you are ready to buy

- You will need to rent - how much rent you will pay vs. you are paying now for your house (including any tax benefits) and how long

It is a difficult decision you need to make.

[Co]

YES, you are correct.   We're more convinced now that staying & moving on with the addition is the best thing for our family.  Thank you so much for your feedback, it's been helpful.

[gobeos]

if you house only worth 330 and you own 460, you are not getting any asset by keeping the house. in the long term, it is more beneficial for you to rent. lets say even if you rent a bigger house, you will have less debt than keeping the house. if you look at the current economy and housing trend. you are not going to get a return on keeping a  house for a long time.

[Boguslaw Megiel · Accepted solution]

Let's do a simple math. All rough numbers.

Assume you "dump" the house and move with renting for 5 years.

Assume you paying 6% interest rate on the 470k loan, and you paying principal and interest every month.

- after 5 years of paying the loan, the principal balance is approx. 435k

- add your income tax saving, mortgage interest and property tax deductions - say conservatively 5k/year (please check your CPA for exact $). Total saving is 25k

So, at the end of the 5 year renting vs. owning your principal balance is approx. 410k.

I hope this helps.

[Nancy D'Alessandro · Accepted solution]

If you love your home, and can see yourself living there for another 10 years, many would advise that you ride out the storm, and stay. You might also contact your mortgage holder and discuss the feasibility of a Loan Modification. If you are having another baby, your expenses are going to go up, and its possible your lender might have a program allowing you to either "fix" your rate on a 30-year term, or possibly modify your amount due to a smaller balance. It doesn't hurt to ask. If they won't do either of these modifications, and you think you can restore your credit rating over the next year or two, try to re-finance to a 30-yr fixed rate at that time so that you don't have to worry about your rate adjusting in a few years. It may take you 10 years to "break even" on your loan amount versus the property value, but a house is not just an investment, it is your "home", and if you love everything about it, and the neighborhood, and your plan is to be there long term... I say, make it work. And Best Wishes! :-)