I am no lawyer or expert, I havent even owned a home before, so I am hesitant to give advice. Just a few thoughts, take it or leave it.
1) you bought 3 years ago, at the height of the market, with a 0 down interest only. I am guessing this is an ARM, and resetting soon. at 45% of income, this isnt affordable, let alone after a reset. You have to do something.
2)I doubt your house has only fallen 20k in value. This seems very optmistic to me. Your 3600 interest only payment tells me this is an expensive house and your insistance on staying until your daughter finished high school tells me you were staying for the schools. Nice houses in good school district areas have not fallen nearly as much as the rest of SD, but assuming your place was say 700kish(?) a 20k drop works out to between a 2-3% fall. Now even the nicer areas are looking more like 5-10% off the bubble, so I kinda think the loss is closer to 60k. Maybe I am wrong.
3) The cost of selling needs to be accounted for too. 4-6% to any Relator. Maybe another 60k?
4)If the place really has only lost 20k, go for the short sale. Banks would JUMP at the chance to only loose 20k, which is what?, 6 months of payments you have been making for the past 3 years. They come out ahead, you get away without too much damage, seems to work. Dont be afraid to use the stick of forclosure to get them to deal, they wont like it, but it is alot better than any other outcome they could hope for.
5) Is there no chance of a REFI? especially with the new Gov bailout using Fannie and Freddie. If your payment was high due to high interest rates due to bad credit a few years ago, your credit should be alot better (3 years no missed payments right?) and a reduction of interst from 11% subprime to 5.8% conforming could be an answer. Atleast call the lender and ask about it.
6) If the above dont work, stop payments, save like mad, and start looking for a rental. In the environment we have now you should be able to say for a good 9 months interst/payment free and a cool 30k in the bank would really help kids in college. Plus give you a huge security deposit to help offset the dinged credit.
7)Just make sure your morgage is nonrecourse if you want to do above. If it isnt, I dont know what to say. Call an lawyer and get ready for a good cry.
8) The market isnt going back up, or staying where it is. Period. I dont care what you want or what your next door neighbor’s son who also happens to be a relator said. You make good money, you cant afford this house. Most other people cant either, and the easy money you used is gone.
I wish you the best of luck. Be honest with yourself and your banker and hopefully you can by that new BMW now since your disposable income is gonna be going up by 12-1400 a month. Pay yourself first, not the bank.
