[quote=wanttobuy]Thanks everyone for the comments. We do intend to sell our current residence in 5 years, thus considering refinancing into 5 ARM interest only, in order to lower mortgage and come up positive when we rent it out. It is not a investment property at all, since we are not building equities. We only hope the house market will pick up in 5 years, so we lose less on this one. As for our planned new purchase, we will definitely take fixed rate.[/quote]
Ugh…So to summarize…
a) You don’t want the curent home, you want to upgrade. b) But at the same time you don’t want to realize the $100k loss, but instead want to wait 5 years to see if the price rebounds
c) During the 5 years, you want to rent out the house to break even or come out slightly ahead while you wait
d) To be able to rent out without being negative cash flow, you need to lower your monthly mortgage, and the only way to do that is to refi into a 5 year ARM.
e)Meanwhile, you’re going to buy another bigger house (with presumably bigger payments) during the time you’re doing (a)-(d) above.
With all due respect, this sounds like a disaster waiting to happen. It seems like your mixing a bunch of things together and only thinking about the best case scenario in each of the above… Let’s look at this from the worst case secnario…
(b)You wait 5 years, and home prices have not improved..In fact it got worse…You are now underwater even more. and/or you can’t sell your place near the price you want…
(c)You rent out the place, but for some reason, rent prices have come down. Even with a lowered monthly on the mortgage, you are now negative cash flow…You just subsidized someone else’s rent at your expense.
(d)You moved into a 5 year arm, and the rate has reset, and is now much higher. In addition to lower rent you are getting from worst case of (c), you now have a higher cost bases on your primary home
(e)Home prices have fallen more and your new home is also underwater.
My take..From the sounds of things, it doesn’t sound like your current home pencils in as a rental property..If you can’t rent it out with a fixed rate mortgage and break even or with a small loss after mortgage/taxes/insurance, then I don’t think you should try. In the past, folks with rentals used I/O or ARMS because there wasn’t as much of a concern with rates that rise quickly…I don’t think moving forward this will be the case. Your other option would be to lower your monthly by a refi into a fixed rate mortgage with a lower monthly, but that would involve bringing more to the table to pay down the home, which defeats the purpose since you don’t really want to keep this home.
So…I guess it all comes down to..How bad do you want that bigger house right now..Because if you or spouse really want it, it sounds like your best option is to sell the current house at the same time you are buying the other place, irrespective of what the current market condition is…Counting on an appreciation to “make up loss” on the old place is gambling, which I suppose you could take a chance IF your pockets are deep enough. But imho, if you want to gamble, you’re odds are better by taking putting money into the stock market in the short term 🙂
I think what you’re trying to do is contrary to what more “conservative/play it safe sort of people are doing now”…
*Folks are either refinancing to into lower fixed rate mortages to cap their future costs of homeownership.
*Folks are reducing their mortgage terms (while keeping their current mortgage payments..going from 30 to 15 years) to try to get rid of the debt as soon as possible in anticipation that the economy is going to get worse, so bad that future income is going to be much lower…
Your strategy seems to be going the opposite by taking on more risk, and I’m not sure what the real benefit is…
I think the problem with your strategy is that you are counting on too many things to turn out the way you think it will turn out…I think the better approach is the plan for the worst case scenarios on most of these things, and anything else that turns out better than worst case is just icing on the cake…
Even if you are correct in that home prices rebound, the other thing is now you need to consider this in terms of “investment opportunity lost”…IE which is better? Waiting 5 years to see if you can recoup some of your losses. Or take your house losses now, and putting that money into some other investment (whatever it maybe) and see if that will be more than how much your home price recovers… If I were betting, I’d say you’re chances are better to recover your losses elsewhere…
Sorry if I sound harsh. But you probably should hear this perspective because it doesn’t seem like you thought about these things yet.
