What should you do if your house is now worth less than you paid for it and it is about to make you bankrupt?

Question

The house was purchased in CA in 2003 and houses take about one year to sell even when the asking price is on the low end. Prices continue going down and if I can't get rid of this house soon, I will have more in debt than in assets - essentially being bankrupt. What to do?? Thanks!

Also I have a 5/1 ARM that will reset in 2009 (I had to refi in 2004 due to divorce). I won't be able to afford the new payment.

This is not an investment property; it is my primary residence and it was one of the cheaper ones in my area at the time I purchased it.

Answer 1

Sounds to me like you bought your house more for investment purposes than for a place to live. When you engage in that sort of deal, it is like any other investment. It can make you money, or it can cost you money.

The fact that you have more debt than asset value does NOT mean that you are bankrupt. You have an asset which changed value. It will probably once again increase in value in the future. If you can afford the monthly payments on the mortgage, stay there and continue making the payments.

Follow up: I just noted that you ALSO got yourself into an ARM. That was about as bright a move as a three watt bulb. You should have taken that opportunity to get a fixed rate mortgage. Now, with the decreased valuation, you will be hard pressed to come up with fixed rate financing for the amount you need. Doubtless, the house will appraise for less than you owe. Your choices are to ride it out or sell and take the financial hit. Neither option is real pretty, but riding it out makes far more sense.

Answer 2

First of all you are not bankrupt, your 'investment' is valued at less then you owe. However, this doesn't matter if you continue to live there a wait for the market to turn (like it WILL DO).

It appears that you can make the payment today and into 2009.

In 2009, the rate MAY adjust. If you have a regular ARM loan which, based on your post, is a 5/1 arm, your may be go up, go down or stay the same in 2009. It will depend on the interest rates at that time. I am SURE that there are caps on this loan. Usually they are 5/1, which means that they can only go up (or down) 1 percent per period and 5% for the live of the loan. For example, if the start rate is 5% for 5 years, in 2009, the most it can go up to is 6% and if every year it increases, the MOST it could go up is to 10%.

This is not a bad loan.

If you feel that the additional 1% increase will hurt you and you can't pay it, then you have 12-24 months to save some money up to cover these few hundred dollars (max) per month. Get a part time job.

If you can't afford this small increase, then sell the home, you have at least 12 months to do so.

Answer 3

"You gotta know when to fold 'em"

Calculate your loan balance and any closing costs to sell it.
Price it with that in mind so as to break even or close.
Use a Real Estate Attorney if needed. A helluva lot cheaper than realtors. Instead of 6%, maybe 2K.
In reality, You'll be ahead without un-affordable payments.

Sell it yourself.
Have "Open House" every day possible. Place direction signs, with arrows, at all the intersections to your address, as well as any needed from the mainroad/s.
Use some banners, flags, and balloons etc to mark your house. Consider a few ads in newspapers for Weekends.
Do this from about 10:00 AM to 4:00 PM.

I sold four houses Myself, WITH Realtors taking commissions.
They weren't worth a damn. One a relative, two friends, one my ex. They sit by the phone waiting. Arrrgggggg!
All buyers were "Drive Bys".

This works. Good luck.

Answer 4

You better sell that one as of yesterday! I see a fire sale coming!