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Underwater Pimpin'

Although we love our home, BMNB and I are among the millions of Americans who owe more on our home than what it's worth. We are officially underwater. We saw it coming when we bought our home in 2008. We had no illusions whatsoever that the housing market would rebound starting in 2008. That's why we sat across the kitchen table from each other before we bought our home and said, "We better really like this house, because we're going to be stuck with it."

Come to find out, BMNB still loves the house. Being stuck? Not so much. BMNB likes to have options. So since we knew we had to make our annual pilgrimage to our tax guy to hear yet again how much we owed the government -- federal and two states -- BMNB figured, why not ask him whether it would be worth it to just cobble together the difference between what we owe and what the house is worth, jet, and start over in a cheaper house.

First, let me say that we adore our tax guy. He's a gun lovin' southern Republican who doesn't believe in letting us give up any money to the government we don't have to. I call him our "tax shark." To be frank, we tend to owe on taxes because it's our fault, not his. He tells us year after year we make too much money and need to start something on the side to get more write offs. We're slow learners. Plus, I think Republicans take a special joy in making sure you don't pay more taxes than you have to. We give him that challenge every year.

When BMNB asked Tax Shark about making up the difference on our mortgage, his first response was, "Don't you dare give that money to the bank! You put that money in your new house and rent out your old house, but don't you dare give that money to the bank."

I love the way that man thinks.

We're not the only ones who are underwater, and the question for those of us who are underwater becomes, do you get out of your house before the difference between what you owe and what the house is worth becomes so insurmountable that you're stuck? Tax Shark gave us another perspective: Underwater pimpin'.

When it comes to money and investments, I think of myself as a pimp. Yes, indeed, I do. My money and investments need to be out on the track, making me money, so to speak. If they don't, I get rid of them, to wit: RIMM, Leucadia National Corp. and Helmerich and Payne, stocks I sold in my 401(K) to buy Google, Apple, Baidu and Berkshire-Hathaway B instead. I'm much happier, and I've more than made up the losses on those, well, hos that weren't bringing in money.

So how do you pimp an underwater house? You either modify the loan or refi it (you can get FHA streamline refis even if you're underwater, I'm told) to the point that the new mortgage is somewhere near competitive with rents for similar houses in the same neighborhood, save up the difference between your old mortgage payment and your new mortgage payment, buy a new house (preferably with an FHA loan with just 3.5% down) and rent out the old house. You no longer care that you're underwater for your old house because you're not paying for it -- your tenant is. And, assuming rents rise over time, you might even make a tidy profit. Trying to pay off a house that will never, ever be worth what you paid for it? Now, that's just sneaker pimpin'. But getting someone else to pay off your overpriced mortgage? That's underwater pimpin'.

Now, underwater pimpin' assumes a lot. It assumes that you can refi or modify your loan. It assumes that you can get your new mortgage payment down to a level that's nearly competitive with nearby rents. And it assumes that the nearby rents won't plummet. Now, if you get into your new house and can't rent your old house out for enough to cover the mortgage, I can't, as an officer of the court, tell you to walk away from your old house. I know there are many out there who believe a contract is a moral document and that you have a moral obligation to pay what you owe under one. You can imagine how little I think of that opinion after having been unilaterally furloughed for two years and having that little arrangement blessed by the courts.

It's just an option. And BMNB likes options.


DeLise said…
Did you end up renting your house? We are in this situation but we have our home and an "investment" property underwater. We considered moving into our investment property and selling/renting our home. two foreclosures on our block prevented the selling option and we couldn't get the loan down to rental levels either. Still looking for options
We got the refi, but given our income bracket, it may not be worth it to us to lose the amount of the interest deduction we'd lose since the payment won't be lowered that much. We're still conferring on the tax front as to the best option. Good luck!

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