Refinancing opions or must go into foreclosure in Northern Virginia (Gainesville: real estate, insurance)

[albi1]

Here's the situation we're in:

Bought a 4 bedroom, 3 1/2 bath townhouse in Gainesville, VA in April 2007 for $330k (including closing costs and no money down) and thought it was a good deal based on the good condition of the house. Today, only seven months later, comparable townhouses are going for $260k right on our street. The mortgage is only in one of our names (we're not married) and it's a fixed rate 30 year mortgage with the first 10 years being "interest only" and the interest rate 6.25%. So, basically our house has depreciated about $70k in 7 months and there's no way we could sell it and break even. On top of it we also are stuck with PMI (Private Mortgage Insurance) which is almost 300 dollars a month. We have thus far been able to make our payments but since we have 10 years of interest only ahead of us and our house is currently selling for $70k less than what we owe, we feel like we're in a money pit. We have absolutely no equity on the house and we've tried to refinance and been told there are no options available. So basically, if we foreclosed and later bought the house across the street in my name only, we'd be saving $70k right there and then. Do you see the dilemma we're in? It'll take us years of paying interest just to recuperate the up side down we're in if we stay and even then we still own nothing because all we've paid is interest. I need your thoughts on this desperately please... This mortgage was approved on one income only which ironically is not enough to live off of if one were to not have someone else contributing to the mortgage. So, my name and my income are not on the mortgage and this goes back to the games finance companies do with numbers to get you approved at any cost. Should we just stop paying to get out of this awful situation? What should we do? How can we get out of the interest only mortgage and the PMI when lenders are not doing that for people who were approved without a down payment and who obviously have no equity?

My other question is if we did do this, what are the repercussions of foreclosure in the state of Virginia? I know your credit is affected tremendously but is there anything else that can happen? Can they garnish your wages? Can they take your car? Can they garnish your Air Force retirement? Do you have to declare bankrupcy? We are permanent residents both originally from Europe and currently awaiting the oath for citizenship, would this affect our citizenship process?

We appreciate any input you may have on my numerous questions.

[jgrfan]

Two things:
Do you HAVE to move? 10 years is a LONG time. You could very well be rightside up by then. If you can still pay the mortgage, just stay put. This should all blow over in 4 or 5 years. You're also getting a very large income tax deduction from the mortgage interest.
Can you pay any more towards the principal? Is there a prepayment penalty? Even if you just put an exta $100 per month (this may be a backbreaker but just an example) you'll pay off an extra $12K in principal over 10 years. Then you're only $58K upsidedown after 10 years.

If you're still $58K upsidedown in your house after 10 years . . . you're problems will likely be so much bigger than negative home equity. For you and everyone else.

[saganista]

I would agree. As long as you can afford to make the scheduled payments, keep making them. What your house is 'worth' in the market is actually meaningless unless or until you decide to put it in the market...by selling. Since selling at the moment would be disadvantageous (as it almost always is seven months after buying), don't sell (via any means) if you don't have to. The interest-only effects of the mortgage are those you signed up for, and they would be just the same even if your house were worth the same $330K today as it was earlier in the year. Personally, I would not bother trying to overpay the mortgage, applying the excess to principal either. That won't materially alter your situation except by decreasing your monthly cash-flow available for other purposes. The advice re the length of ten years above is sound. The next President, even if re-elected, will not be in office ten years from now. Much will change and change again over that interval. It is almost inconceivable that there will not be points when it will be favorable to either sell or refinance your mortgage along the way. Sit back and wait for one to come along. Inflation, population growth, and the fact that bad markets for good products tend to improve over time, are all working on your side. Panicking over short-term up's-and-down's is only a way to lock in losses that you don't need to take. If you liked the house enough to buy it last Spring, chances are that you like it enough to keep living in it, so that's the thing to do...

[knopfler]

Originally Posted by albi1

Here's the situation we're in:

Bought a 4 bedroom, 3 1/2 bath townhouse in Gainesville, VA in April 2007 for $330k (including closing costs and no money down) and thought it was a good deal based on the good condition of the house. Today, only seven months later, comparable townhouses are going for $260k right on our street. The mortgage is only in one of our names (we're not married) and it's a fixed rate 30 year mortgage with the first 10 years being "interest only" and the interest rate 6.25%. So, basically our house has depreciated about $70k in 7 months and there's no way we could sell it and break even. On top of it we also are stuck with PMI (Private Mortgage Insurance) which is almost 300 dollars a month. We have thus far been able to make our payments but since we have 10 years of interest only ahead of us and our house is currently selling for $70k less than what we owe, we feel like we're in a money pit. We have absolutely no equity on the house and we've tried to refinance and been told there are no options available. So basically, if we foreclosed and later bought the house across the street in my name only, we'd be saving $70k right there and then. Do you see the dilemma we're in? It'll take us years of paying interest just to recuperate the up side down we're in if we stay and even then we still own nothing because all we've paid is interest. I need your thoughts on this desperately please... This mortgage was approved on one income only which ironically is not enough to live off of if one were to not have someone else contributing to the mortgage. So, my name and my income are not on the mortgage and this goes back to the games finance companies do with numbers to get you approved at any cost. Should we just stop paying to get out of this awful situation? What should we do? How can we get out of the interest only mortgage and the PMI when lenders are not doing that for people who were approved without a down payment and who obviously have no equity?

My other question is if we did do this, what are the repercussions of foreclosure in the state of Virginia? I know your credit is affected tremendously but is there anything else that can happen? Can they garnish your wages? Can they take your car? Can they garnish your Air Force retirement? Do you have to declare bankrupcy? We are permanent residents both originally from Europe and currently awaiting the oath for citizenship, would this affect our citizenship process?

We appreciate any input you may have on my numerous questions.

I agree with the other posters so far, but a couple additional notes:

Lenders aren't able to garnish wages, take your car, garnish retirement pensions, or force bankruptcy. I'm not sure how it would affect your citizenship process - you'd want to talk to an attorney regarding that.

What I do know is this - your premise of foreclosing and then buying a house down the street is flawed. If you did that, nobody would lend to you at an interest rate under 12% right now. The credit crunch is too steep, and your credit after a foreclosure goes straight into the toilet and stays there for years. And then when you calculate payments on 260k at 12%, you'll wind up actually having a bigger cash outlay problem than before the foreclosure - and this isn't counting the higher interest rates you'll pay for car loans, credit cards, student loans, and everything else for the next TEN years.

My best advice is to chill out! You can make the payments. Luckily, you're not in a negatively-amortizing loan, which is even worse than the one you describe. You're upside-down now, but that's only relevant if you absolutely need to sell now. You don't. Revisit the situation in a couple years, when the market has stabilized, credit lending has normalized, and you might have made up some of your losses.

And don't ever, ever, be talked into such a lousy loan arrangement again.

Oh, and PS - talk to an attorney about making arrangements like a will, advance medical directive, and durable power of attorney, especially if you decide (for whatever reason) not to marry. Virginia doesn't treat un-married couples very well, legally.

[saganista]

Originally Posted by knopfler

Oh, and PS - talk to an attorney about making arrangements like a will, advance medical directive, and durable power of attorney, especially if you decide (for whatever reason) not to marry. Virginia doesn't treat un-married couples very well, legally.

That's an excellent point!!!

[Margery]

If you are able to make payments, for heaven's sake don't even think of foreclosure as a way of getting out. You will ruin your credit and I can't imagine any mortgage company making you a loan to buy another house if you have walked away from one.

You are going to have to make a monthly payment to someone for a place to live and with a mortgage you do have a large deduction for the interest and real estate taxes.

Unless you have to move, sit tight. The market will improve in a few years and you can sell or refinance then.

[Yankeesfan]

All good advice. Don't do anything. Just stay where you are and rest assured things will improve over the next ten years.

[DavidS827]

For the short term, you are in a money pit. However, I can all but guarantee that your home will be worth significantly more than you paid for it in 10 years. Also, your loan actually doesn't sound that bad. A 10yr I/O with PMI is pretty vanilla. You can make additional principal payments when you like and you'll notice that your Interest Only payment will go down the next month. As for the PMI, most people just hear that accronym and automatically assume that it's bad. That couldn't be further from the truth. PMI actaully makes it easier for you to qualify for a loan, may have gotten you a better rate than you would have if you had taken on a 2nd trust instead, saved you money in closing costs and probably kept your payment lower than it would have been if you had done a 1st and 2nd loan. So, sit tight, wait for the market to come back and don't worry about what your neighbors house is selling for.

[El General]

A lot of folks are in way deeper then you all. Count your mixed blessings, under the nice roof you have.

[normie]

NOVA real estate has been a real roller coaster for the past 20 years. The diving plunges can be nerve racking, but 4-5 years later it always seems to go back up and then higher than before. I'd hang in there.