Saddled with two mortgages

Kate Ashford  |  12:34 PM, Wednesday, May 18, 2011

It’s a homeowner’s nightmare: You’ve just purchased your dream property and you think you’ll have no trouble jettisoning your old place. But months later, you’re still hosting open houses and you’re juggling two mortgages. At the peak of the housing market, this scenario wasn’t a common problem. But in today’s economy, homeowners who underestimate how long it’s going to take to offload their house may be in for an unpleasant surprise.

Buying a new home before you’ve sold your old one is “one of the dumbest things that homeowners are doing now,” says Keith Jurow, a former senior economic writer for the Holt Investment Advisory and author of the Housing Market Report. “No one would do it if they thought they’d have trouble getting rid of the house they just left. They don’t know how bad the market is.”

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How homeowners are handling the problem

Amanda, 27, is a homeowner who’s found herself in exactly this position. A few years ago, she and her husband bought a new house to be closer to their jobs, but they weren’t able to sell the old one, despite spending thousands on improvements. Decreasing property values made it impossible for them to get the price they needed to cover their first mortgage. After months on the market, Amanda, who lives in Albuquerque, decided to rent the house out. “It’s not the best situation, but we’ve been really fortunate to find tenants who have taken care of the property,” she says. “And the tax incentives have helped a little.”

Nonetheless, she and her husband are out about $200 a month on costs for the first house, and they don’t see the situation turning around anytime soon. “If anything, it’s in a worse situation now,” she says.

Terri, 50, is also a reluctant landlord after she and her new husband were unable to sell the New Hampshire home she’d lived in with her ex. Now they’re using a home equity line of credit to bridge the gap while they shoulder two mortgages — renters in the first house help, but with the mortgage, taxes and insurance, all their costs definitely aren’t covered. “We didn’t know things were going to get so bad,” she says. “I would say to anyone, don’t put the cart before the horse. Don’t gamble, even a little in this economy. There is no wiggle room.”

Although she’s renting to family, Terri isn’t wild about being a landlord. But the alternative — moving back into the home she shared with her ex-husband — isn’t attractive either. “That would be a giant step backwards emotionally for me,” she says. “I would just as soon let the home go back to the bank as move back there.”

Regrets? She has a few. “We should have waited,” she says, “sold the other home and used the money as we saw fit at that point.”

Amanda and Terri aren’t alone in their troubles, and renting isn’t the only answer to this problem, although it’s one of the better ones. Frankly, the best approach is the obvious one: Sell the home you’re in before you plunk money down on the second. “A lot of people have an emotional problem with this,” says Rick Kahler, a financial planner in Rapid City, S.D. “They think, ‘If I sell what I have, how do I know I’m going to find something I’m going to want to buy?’”

The key, he says, is to start with the hardest task. If it’s a buyer’s market and selling your home is going to be the most difficult part, then that’s what you want to do first. If you’ve got the opposite issue (or a time machine to take you back to the mid-2000s), then by all means, buy first and sell second. “We saw that back in 2006,” Kahler says. “People were lined up to buy.”

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Four ways to cope

If you find yourself between a rock and a “For Sale” sign, however, you’re not completely optionless. Here, some suggestions from the pros:

1. Refinance. If you’re carrying two mortgages, the biggest problem you have is probably cash-flow related — you’re throwing money at two house payments, two insurance payments, and two sets of tax bills. Now that interest rates are so low, you may be able to lower your monthly nut by refinancing. “Any time you’re going to own two homes, you’ve got to ask yourself, ‘Can we make these two payments?’” Kahler says. “And if we can’t, what we need to do is have some type of contingency plan. And that might be refinancing.” You can find current rates on Bankrate.com.

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2. Rent. If the housing market in your area is dismal, consider installing tenants in your property until buyers start buying again. Even if the rent doesn’t totally cover your costs, it will lower them significantly, which could enable you to carry two mortgages for a while. There are downsides: If you keep the house on the market while renters are living in it, it might not show as well. “They may also leave the place in worse shape than it was in when you lived there,” Kahler says. And this is infinitely easier if you still live near your old house. Otherwise, think about hiring a property management company. “They’ll prescreen for you, get a good tenant in there, and manage the property,” Jurow says. “It’ll cost you about 10 percent of the rent every month, but it’s worth it.”

3. Take the hit. If you’re not selling the old house because you’d lose money on the deal, you may just have to suck it up. “There are a lot of people passing up a nice job offer out of town because they can’t sell their house — they don’t want to take a loss,” Jurow says. “What do you want to do, stay on unemployment for another six months? Taking a loss is better than having it foreclosed on.” If you have the money to cover the difference, and you don’t want to put renters in the home, selling it for less than you paid for it isn’t the end of the world. Sell it — even if that means dropping the asking price — and get on with your life.

4. Consider a short sale. If you’re really stuck and your house is under water, a short sale — where the bank accepts less for the house than you still owe on your mortgage — won’t harpoon your credit quite as much as a foreclosure would. Before you proceed with this kind of thing, though, have a conversation with a HUD-approved counselor to make sure you have no other options (and that you proceed with this option correctly).

In the end, there aren’t a lot of fun choices when you’re carrying two mortgages and can’t get rid of one of them. “You’re in a bind,” Jurow says. “That’s life. You’ve got to choose which one is the better of bad alternatives.” But no matter what, there are alternatives to walking away from your mortgage. Come up with a plan before you fall behind on your payments.

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