How to wait out creeping home equity gain

lifesaver

Home equity gain is good news, especially for underwater homeowners waiting to see home values return to and surpass their purchase cost.

Unfortunately, homeowners who lost 50 percent or more of their home’s value aren’t likely to enjoy even a break even point for a decade or more, based on the recent rate of home value gains.

CoreLogic.com recently reported a 3.8 percent rise in home prices, contributing to some 700,000 homeowners reaching a state of positive equity in the first quarter this year.

Home equity gain in the housing market is helping some homeowners enjoy appreciation above their original purchase price, but only if they lost 3 to 10 percent of their equity.

Those who are upside down by 50 percent or more may not see enough appreciation to break even, at the current rate of gain, until 2022 or later.

Calculating the break even point

For example, at CoreLogic’s recently announced 3.8 percent rate of appreciation, if you owe $450,000 on a property now worth $300,000, it will take nearly 8 years to break even, provided home values continue to increase at that rate. Also, your current mortgage must be a fully amortized loan. If it is an interest only loan, it will take many more years to reach the break-even equity point.

Again, this is just a break-even point. To sell at a price sufficient to cover commissions and closing costs of about 8 percent, it could take more like 10 years before you can sell and not have to dig deep for closing costs.

If you owe double what your home is worth, the time it will take to break even in value would be more than 12 years, and another 2.5 to 3 years to have enough equity to sell your home and gross enough to cover closing costs – that’s 15 years just to break even.

There are many advantages to home ownership beyond dollars and cents. We buy real estate as an investment and sometimes that means buying a good investment or a bad investment.

Loan modification option

Play your cards right, however, and you can turn a bad deal into a good one.

If you qualify, you could obtain a loan modification, which has become risk adverse lenders’ go-to foreclosure-alternative of choice.

If your total monthly mortgage payment including taxes and insurance exceeds 31 percent of your gross monthly income, and you have enough income to pay for your reduced mortgage payment after a loan modification, it could be a solution for you.

Lenders are dropping interest rates as low as 2 percent, exempting deferred principal from interest payments and extending the life of mortgages for up to 40 years.

If your home is worth $300,000, but you owe $600,000, you could lower your mortgage payment to $1,454 by dropping the rate down to 2 percent for 40 years and having 20 percent of your loan balance exempted from interest payments.

That would give you an effective, unbeatable interest rate of 1.6 percent.

If you were to buy that $300,000 home today at 4 percent for 30 years, your principle and interest payment would be approximately $1,432.

That’s only a $22 difference in principle and interest payments per month, compared to the modification, which adds 10 years to your mortgage.

Move out, rent out the modified home

If you need to move out, say to relocate or effect a life change a few years from now, you likely can rent out the home for more than your total mortgage payment and have an investment that not only pays for itself, but pays you dividends every month for the next 30 years or more.

Chances are, you’ll be unable to buy another home with an existing upside-down mortgage. Most lenders will require you to put at least 20 percent to 30 percent down for the purchase of your new home.

However, as a renter your rent will be subsidized by the amount of rent that you are receiving over and above your mortgage payment on the modified property you keep.

Even if your rent is the same as your modified mortgage payment, you will retain an investment that pays for itself. As rents rise, little by little, you will begin to enjoy monetary gain every month, in addition to appreciation on the home you are renting out.

Of course, this is all contingent upon qualifying for a fixed-rate loan modification with terms you can afford.

Equity gain wait alternative

If you can’t get a loan modification, you may have to sell now and return to the market two to three years from now.

Chances are, you likely will pay a little more for a home in three years, but your other alternative is waiting up to 15 years or more to break even while everyone around you, who managed to buy at today’s home prices, have enjoyed substantial home equity gains.

The key is to think like an investor. Successful investors know when its time to hold ‘em and when it’s time to fold ‘em.

Selling your upside-down home may not feel like the best solution for you now, but it could become the best move you make.

To consider these options to waiting for equity gain, seek the advice of a qualified certified public accountant, attorney, financial planner or others to help you understand any tax or legal consequences that could arise.

About the author

DeadlineNews.Com's Silicon Valley Correspondent and answer-man, Robert Aldana is a 25-year real estate veteran and publisher of "LetsTalkRealEstate.com," a digital spin-off of a popular television and radio show of the same name. Through "Lets Talk Real Estate," for 15 years, Aldana has guided and counseled thousands of real estate consumers. Aldana has also served as a director and vice chairman for the California Association of Realtors. He is also a member of the National Association of Realtors. Network with Robert Aldana on LinkedIn. Do you have a real estate question for Robert Aldana? Send it to: Robert Aldana, "Let's Talk Real Estate"

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