Our series about six options if you are underwater on your home has drawn a lot of comments. Some readers are wondering whether they should stay and pay or try to get out. Here’s a reader question we received this week:
I have been thinking a lot about whether to keep my home. I really feel like the place is a money hole. I paid $455,000 for my townhouse and the place across the street is selling for $150,000. I still owe $190,000.
I can afford to pay for the place but I feel like I could lose more money in the future. I tried to rent it out but found no promising tenants.
I really don’t know if I should keep it or not. I have a very long one and a half hour commute, and now I have a young child too. I am thinking about just renting a small place near work and starting over. Which of your six options are good for my situation? Please help! — Stuck in California
I can only imagine how stressful this situation is for you, but I think you need more information before you can make a decision. You don’t need to go into “analysis paralysis” but you do need to investigate three things in more detail:
Find out exactly what kind of places are available to rent closer to work in your price range. Don’t just look online—go and look at some places and talk to the landlords so you can get a good idea what they require in terms of first and last, security etc. Get a good feel of whether you could rent an acceptable place for what you are paying now. (And of course check out schools since that will be an important factor with a young child.) If you are in a position to buy in another year or two, consider also looking at homes to rent with an option to buy.
If you discover that you’d have to pay a lot more to live closer to work, or if you can’t find something acceptable in a decent school district, you may decide that it’s better to stay put. Or maybe you’ll discover that for a little more you can get a decent place and save an hour a day in commuting time. You won’t know until you hit the pavement and check out what’s available.
Find out if you will be on the hook for a remaining balance. If it you have a non-recourse loan, the property is the only collateral for the loan and you can likely walk away without worrying that you will be sued for a deficiency. Many purchase money mortgages in California are structured that way. If you are not sure, make an appointment to talk with a real estate attorney who can review your paperwork with you.
Find out what your tax liability may be. Meet with a tax professional (an enrolled agent or CPA) with experience in handling 1099-C and 1099-A issues to learn whether you would owe taxes on the forgiven balance if you do a short sale or walk away. You may be eligible for the Mortgage Forgiveness Debt Relief Act or the other exceptions or exclusions I outlined in my previous article on this topic. This is an important question because you don’t want to be surprised with a large tax bill.
Since you bought your home for $455,000 and owe $190,000, it sounds like you’ve lost quite a bit of money that you put into it. That has to be a very tough pill to swallow. It also sounds like you are worried the value can go down further. It’s impossible to predict, though, how much further home values will drop or how long they will take to stabilize and then start going up again in your area. That means there is no single right or wrong answer here. Gather some more information and make the best decision you can knowing that at least you’ve made an informed choice to stay or leave.
Do you have a question for Credit.com’s Credit Experts? Submit it to creditexperts@Credit.com. We can’t respond to every question but we’ll choose the most relevant and educational ones to answer on the blog.
Image: silent(e), via Flickr.com