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Sell and Lose, or Hang On?

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Posted On: 04/25/2012

Question:

I bought a 2-bedroom, 2-bathoom condo in California in 2007. I paid $665,000 with $250,000 down and financed the rest with an interest-only loan to keep monthly costs as low as possible. My 3.25-percent loan expires in five years, and I cannot afford the higher payments because I will then be retired. I believe in the next few years that interest rates will rise but home values will not increase to the levels seen in 2007. Does it make sense to sell now at a loss and then rent at a lower cost and save money, or should I hang on?

Answer:

We don't know what the future will bring in terms of either home prices or interest rates. What we do know is this: In several years your home will be unaffordable if rates rise above today's record-low levels.

Right now you have the opportunity to control your finances by selling. Having bought at the top of the market, you will have a loss. If you sell you will then need replacement housing, most likely something less costly.

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However, there are other choices to consider:

• Offset your current monthly costs by renting part of the property to a relative. Then refinance to a long-term, fixed-rate FHA mortgage.

• Sell an interest in the home – equity share – to an investor and refinance at today's rates.

• Stay in place and sell the home under the condition that you can remain as a tenant with a given rent (a sale and leaseback). Because the buyer has no vacancies you may be able to get a lower rent.

• Find additional income, save and then refinance to a smaller loan (though interest rates may increase).

• Sell your current property and buy, not rent, a less expensive replacement home that can be paid off over time.

For further information please speak with local real estate brokers and lenders, in addition to a fee-only financial planner.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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