February 4, 2009 • June Walbert
Q: We currently own a home in Florida that is valued at $217,000. We owe $136,000 on the mortgage to include a $30,000 home equity loan that we used to improve the home. We paid $142,000 for it and have only lived in the home for one year in 2002. We bought it with the hopes of someday living there but it seems as if it will not happen. We have rented it off and on and have not until now been able to rent it for what we pay for the mortgage which is $1056 a month on a 30-year-fixed VA with a 7.5% interest rate. The taxes on the home are $3,500 a year. My question is: should we try to sell the home now since we probably will not be living in it or should we keep it as an investment and pay it off sooner? We do not have any debt other than the mortgage and with our son in college and another one headed to college; we would like to get rid of the payment one way or the other. Thank you.
--Melisa
A: I’m not sure about the area where your home is located, but a lot of the folks I’ve talked to in Florida have told me this is an awful time to be selling real estate. That said this may be a great time to explore your options with respect to refinancing. Based on the numbers you provided, it appears you may be able to refinance both of your loans in a new 30-year mortgage and reduce your monthly outflows. This may make the property all the more attractive as a rental and if and when the real estate market turns, you’ll be in position to make a decision to sell or hold on your own terms.
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If I can offer an opposing view...
When we make sell decisions, we tend to color our decision with historical perspective--how much have I put into it. The real question to ask oneself is: "would I buy this today?" Each day you don't sell an investment is a day you purchased that investment, for better or worse.
The Florida real estate market is terrible, I know, I live in Tampa. But, the rental market isn't any better. Putting more money into the investment through a refinance on the chance that you'll find renters that can cover the mortgage is taking a gamble. There's no telling when the real estate market recovers, but when it does it's likely to follow the lead of the stock market, which is likely to post better returns than real estate when the economy recovers.
I would recommend cutting one's losses. This is an investment bleeding money rather than a primary home. What the home was valued at last year or in the future is irrelevant at this point, it's worth what it's worth, the question is what will you do with that capital? Keep it invested in a slowly depreciating asset with plenty of carrying costs (maintenance, insurance, taxes, and not to mention the poetantial of a weather loss) or cash-out and reinvest in potentially more lucrative, yet safer, investments (including a child's education).
Posted by: Chuck | February 04, 2009 at 05:13 PM