My Underwater Home

This Wall Street Journal column reads like my own history. I had been single since my divorce from my first wife in 1999. Child support was high, and I didn't have a lot of money, so I rented. That was OK by me, because I was left with little money at the end of the month, and renting fit my bachelor lifestyle just fine.

That was until three events occurred that would shape my financial future far more than I ever knew. The first was that my ex-wife threw our 16 year old son out of the house in 2004. It seems that he was getting more expensive to take care of than the child support was giving her, and at 17 years old, his tax credits would no longer be available to her.

The second factor was that I got engaged, and my new wife to be (and her cat) moved into the house in preparation for the upcoming nuptials. Then, my daughter was thrown out of the ex-wife's house for the same reasons that my son had been tossed out. All of a sudden, there were four people and a cat living in a two bedroom apartment.

It was obvious that we had to get a place to live that would better suit our family. The wife to be and I planned ahead, and decided that a three bedroom home would be good for us now, and then when the kids moved out, would still be small enough to be manageable. I thought about renting, but EVERYONE from financial experts to family told us that buying was the way to go.

We shopped around and found a 1500 square foot house with three bedrooms and two baths on a quarter acre lot for the low asking price of $250K. At the time, the median home in the Orlando metro area was selling for $255K, so we were NOT being greedy, especially considering that we were making a combined $110K a year. We made an offer, and after some back and forth, we settled on a price of $236K. Everyone I knew said that I had gotten a great deal. The following paragraphs are from the article, but it is like the author was at my closing:

Because we were plunking down only 7% or so on the down payment, we were faced with a steep insurance fee. I was naively insulted by this PMI–the idea that we were risky borrowers out of the box. So we opted for a "piggyback" loan, a second loan that would cover the rest of the down payment and allow us to avoid the PMI. We would pay about the same per month, and when our home's value rose, we would refinance and combine the two loans into one. A lot of the people I turned to for advice were recent homebuying colleagues facing similar questions, or longtime owners who were doe-eyed by low interest rates. I don't recall anyone saying "Dude, wait a few years."

We negotiated a bit on the price and closed the deal in May [2007 for about $232,000] at a 6.12% rate. At the time, I didn't know that the second loan was a de facto home-equity line of credit. I knew it would be a higher rate–a little more than [2] percentage points higher. But the loan amount paled in comparison to the main mortgage, so I wasn't overly concerned.

On signing day I thought I was prepared for the blizzard of paperwork. I wasn't. This is apparently a rite of passage not exclusive to any era. There was at least one big reveal: Our piggyback loan was actually a balloon loan. In 15 years, we'd have to pay a big chunk, in the thousands, in full. I was taken aback by this–how could I have missed this detail? I'm not a financial luddite.

 Zillow now estimates my house to be worth about $110K. That may be high, as Zillow estimates that the home 2 doors down is worth $145K, and it just sold for $110K. The tax assessor values it at $99K. That's right- my home is worth about 45% of what I currently owe on it. (If you want to read how that happened, and how the banks profited by it, read this)

To make matters worse, both my wife and I have taken reductions in salary. We are making 14% less now than we were when we bought the house in 2007.

One thing the Fitzgeralds in the article failed to really appreciate is this: I owe $125,000 more on my home than it is worth. In 15 years, I will still be underwater on this home, but I can rent a comparable home for $700 less than my monthly payment is now. Even including the mortgage tax deduction, that comes to $500 a month. In 15 years I will have paid $90,000 more for this home than I would have paid to rent, and I will still be underwater. That is $90,000 more that could be in my retirement fund.

No thanks. My decision has been made.