Home Owner & Landlord at age 19 – I decided it was time for me to move out. I wanted to buy a house (at age 19). I figured it would be more financially responsible to buy and earn home equity rather than throwing away money to rent each month. I found a cute little yellow house nearby the college – I was overcome with excitement. It was perfect! During my college years I rented out extra rooms to fellow students. Everything seemed to be going alright. But things took a turn for the worst.
Tuition at the School of Hard Knocks: $50k – Housing crash. Tenants from Hell. Repairs. Refinance. Divorce. More Crappy Tenants. Eviction. UGH! And when it all boils down. I’m drowning in my under water home. So at the end of the post I left you with a rough estimate of how financially ruined I am. I was awaiting on some info from a local Realtor to share with you. So the results are in and I amend my previous estimate – and the news is good (a bit better than I thought).
Comparable Market Analysis Results
I contacted a buyer’s agent, Dale King and after some back and forth emails and photos he gave me some great tips on high ROI improvements and a good idea of the current worth of my house based on recent similar home sales in my area. In addition to the tips he gave, he also pointed me to a great article he wrote with tips for selling your house.
So the good news is that my house is currently worth a bit more than Zillow predicted. Dale says in its present condition and local market in my area, my home is worth about $80,000. Okay. Sure that still means I’m very under water, but I’ll take any good news I can get, no matter how small!!
Today’s Predicament (Updated)
I purchased in 2007 at $136k and now it’s worth about $80k. I’ve lost about $56k on my house; Like a clearance, my house is marked down – 41% off!
Today I owe a remaining principal balance of $123,258.38. That’s significantly more than what it’s worth. Yep, I’m currently $43,258.38 under water.
But wait, There’s MORE! Not only am I terribly underwater, but it’s getting worse faster than I can fix it. It seems like the house is losing value faster than I can contribute to the principal. Over the past few years I have been pouring money into a bottomless pit. Like pouring sand into a bucket without a bottom….but worse. Not only am I not accumulating any ‘sand’ but I actually OWE more sand than I am pouring in. (does this even make sense?)
Please just stop the bleeding 🙁
My Plan to Mitigate my Mortgage Debt
Basically I am stuck with this house until I can get above water, sell the damn thing, and swim to shore. Until then, my net worth is negative and I can’t even fathom financial independence. So my new financial mission is to focus on getting the house above water. It’s a common savings/investment strategy – focus on paying off debts first, then work on saving up wealth. The rationale is that oftentimes your debt is costing you more in interest than you can get in dividends/market gains by investing or saving up a stash. In my case, 4.5% on my debt is a pretty good rate and probably less than what I would get by investing in some Index Funds. BUT that’s not the only thing I need to consider – I have that stupid & unnecessary PMI payment too. So here’s my plan of attack:
Ditch my Retirement Savings
Okay, not completely. Calm down. I was contributing 8% to my 401(k) but now I have reduced my contribution to max out my employer contribution and not a penny more. I figure I should get at much free $ as possible, but I want to be able to put as much as possible towards my main goal: the house. So I’ve reduced my contribution to 6%.
1. Destroy PMI with Extra Payments
I mentioned before back in 2011 I did an FHA Streamline Refi at 4.5%. BUT what I did not fix was the fact that I still have to pay Private Mortgage Insurance. 🙁 PMI is like a penalty for buying a house before you’re ready. What I mean is that if you don’t have a 20% downpayment, you will incur this insurance premium until you have paid down the mortgage to 78% of the original loan balance. Supposedly at that milestone there is “automatic termination” of the PMI. I am paying around $120/month for this insurance. When I get my principal balance down to about $101k or 106k*, I believe that I can go to the bank and demand that they quit charging me for that stupid insurance.
My goal is to pay more than my mortgage payment each month which will help me avoid some interest in the long term and get to the 78% mark ASAP. And I’m crossing my fingers that even works because my bank could just say “no.” I have read numerous accounts from people who had this problem and had to really fight or refinance with another lender to cancel their PMI. I’ll be working out those details and write another post soon about PMI.
2. Increase Home Value (Carefully)
The fastest way to get above water will be by burning the candle from both ends so to speak. So in addition to paying down the mortgage I want to increase my home’s value. I’m walking a fine line here though. Based on my neighborhood quality, demographics, and comparable homes nearby, there are are plenty of upgrades that wouldn’t pay off. I have to be carefully avoid overspending on home improvements because I don’t want to put more money in than I can get out. Typical high ROI (return on investment) upgrades don’t even apply for my neighborhood. For instance, a kitchen featuring new stainless appliances, custom cabinets, and granite countertops would be WAY overkill – the market here wouldn’t support a home price justifying that kind of investment. So I’m only going to put my money where I’ll get the highest impact. That includes Preventative Maintenance & Home Repairs as needed and HIGH ROI projects only (taking into consideration the current market and similar houses nearby. The goal is to spend the least amount possible for maximum impact so I can focus on extra mortgage payments.
Dale gave some great advice to me based on my photos and description of my house. And if you read the article I linked to, you saw his great seller tips. The tips in his article are VERY low cost ways to improve the outcome of the open house and/or home showings. By putting my ideas and his advice into action he estimated I could sell my house for about $95k-$99k. That’s a great ROI because I anticipate it will only cost about $8k for all of my home improvement plans. Stay tuned for an article about those plans!
3. Get Above Water – Work towards positive equity
Based on that $95k-97k future home value estimate, my overall goal is to pay down my mortgage to a principal balance of about $97,000 to break even and start my positive equity!
After I destroy my PMI payment, I can start putting that extra money saved towards the mortgage payment too. I also plan to continue learning more ways to cut costs in my budget and apply those savings towards the mortgage. The more money I can throw at my monthly payment, the faster I can get to this point. AND hopefully the local housing market will bounce back in the next couple of years which will help me out a lot – that alone could possibly make the biggest impact.
So, I know it’s going to be a long uphill battle for the next few years, but I’m hoping with some furious effort, I can turn my situation around by mid 2018 or so? I should do some math to make sure that’s a reasonable goal!
*$101k is 78% of the refinanced loan amount, $106k is 78% of the original loan amount. I’m not sure which figure is my target yet.
Image Credit: “Light at the end of the Tunnel” by John McCullough via Creative Commons license