Quote:
Originally Posted by GregWeld
Wow! What a great question!! Not sure I can answer it... but I will discuss "my" thinking about it.
#1 -- Your real interest rate depends on your income tax rate... So we can't do any real math -- and frankly -- for this discussion - we don't really need to.
#2 -- 9% is crazy stupid interest to be paying -- on the surface -- but that bigger number is also reaping a bigger tax benefit (see #1) so while the base number seems "stupid" -- it might not be as bad as you think.
#3 -- The house being under water really isn't as important as you think it is. Yeah -- it's under water now... and yeah -- nobody knows when the market is going to crawl it's way back... but eventually you're going to gain on that "deficit". And -- you have to live somewhere... so right now you're paying rent instead of making headway on the mortgage and building "equity".
#4 -- I wouldn't pull money out of savings or anywhere else -- just to put it on an underwater mortgage... UNLESS.... Unless you could refi the house and get a under 4% 30 year fixed rate mortgage -- that was going to allow you to put that money BACK in short order... and then continue to save every month from here out.
So if you could pay down the mortgage and get a new 80% mortgage you might be ahead over the VERY long run. Either way -- you're stuck in your house until the market rebounds.... Because in the end - you've still (currently) paid more than the house is worth regardless of the financing.
Does that make sense?
SO ----- you're making money --- probably at a faster rate -- on your INVESTMENTS than you are on your house rebounding (big if right now). The more you make on your investments the better off you are in the long run because of the compounding. And as those grow - and hopefully the house starts to gain some ground too -- the difference in the value of the house is shrinks. As it gets closer to what you owe -- and you have more CASH ASSETS you become a better credit risk... If your investments continue to compound -- you might be able to pull out far less to do a refi.
I think the biggest "item" here --- is that regardless of the interest rate - you're still sinking money into an asset that has no real value... CASH is king (cash is any salable asset in my book - and the house "isn't" one!)... and just to save a bit (not sure how much because we have no numbers to work with) on the monthly payment doesn't really help you out much... ya still owe the dough.
Ordinarily -- you'd say anything you're not paying out monthly is money saved and would be a good thing. But to try to fil a hole in a big bucket that you can't really fill up ain't going to do you much good. I think you're better off sitting tight and hope that the market starts to go your way.
So just a "real life" example --- I had bought a condo in Tempe area for the kids to live in while attending ASU... we paid $307K for it in 2007... the market since went south --- and I had paid cash for this property. I just sold it and closed last week... for $110K. It really doesn't make any difference whether I owned it - or was making payments or anything else... it's still a LOSS. Period. If I was living there and making payments... I'd be underwater -- but I have to live somewhere.... and I wouldn't actually be loosing the money (yet) - ya don't lose til ya sell.... And if the market came back to say $175K --- if I was to sell - I'd have lost "less"....
Now -- as above -- by having all that cash in the place -- I also had an "opportunity cost" attached to that money. I wasn't making ANY income off that money -- and there is a real cost associated with that. Had I been making money off the $307 - let's say I financed $250K.... and I'd have made 10% per year -- $25K - over the 5 years -- that's $125K (not compounded even!). Less the financing costs... and less the tax deduction for the interest rate paid etc... I think I'd have been ahead (not much) if I'd have made payments!
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Thanks.. Greg... ok Phase II... (your answer triggered this) I also have a Condo that I own same loan situation 80/20 underwater... the HELOC is at 8.5... Same situation.. i pay off the HELOC and its still under water.... I rent it out and have so for about 5 years...it just about break even annually... give of take a few hundred bucks..... do I pay off that HELOC?