digging out - first steps and lots of advice needed please! (sorry for long post)

[Anonymous]

Hi -

I am trying to get back on track with my finances.  I am overextended on my house (a little more than 55% of my net pay/month) which I bought 1 year ago.  This area is having a lot of growth - keeping up with demand.  The net result is virtually no appreciation.  I don't expect that to change for another 2 years or so.  So next year I will be in the same boat - no appreciation on the house.

House:

363K primary @ 5.75 (30yr fixed)

69K secondary @ 8.5 (10yr fixed with balloon)

Debt:

6K in cc debt with CITI @ 1.9 fixed

11K in cc debt with MBNA @ 9.9 fixed

5K in cc debt with Nordstrom @ 15.15

13K in student loans @ 4.25

15K in car loan @ 5.9

I have about 7K in cash/savings that I am holding in a high-yeild savings account until I figure out what to do.  I have put all of my finances into Microsoft Money - and am tracking my spending (I now know where I need to cut back!  My dog eats better than I do!)  In all seriousness - I am going in the hole every month about $400 - and making it up with tax refunds and bonuses (about 6K ea/yr)

Goal:  to get debt-free (exception: mortgage), have 3 months of living expenses (5K/mo) in the bank and have some home equity 3 years from now.

Option 1:

Downsizing on my home - taking a huge hit (basically selling at the same price as I bought it - minus realtor fees) - possibly even writing a check at closing for about 5K.  Then I would buy a smaller condo and finance 100%.  This option will take all of my savings and the small amount of home equity I have (5%) - but I won't have to touch my 401K.

Option 2:

I could downsize and take enough money out of my 401K to finance a 5% down payment for my new home and cover the loss from the sale of my current home.  I would use my savings to pay down debt.

Option 3:

Don't downsize, use savings to pay down debt.  Keep using tax refund/bonuses to make up shortfall until (hopefully) income catches up.

Option 4:

Don't downsize, use cash to pay down debt and use money in 401K to wipe out credit card debt - so that monthly budgets match income (living within means).

Option 5:

Don't downsize, use savings and some money in 401K to get to 90% LTV needed for optimal re-fi

My FICO is 716 - so I don't think that I will have a problem with a mortgage.  I got pre-approved through my bank (75/25 loan at 6.75/9.75) - but I could get an ING 5/1 ARM at 6.5 for 90% LTV (the most they will loan me based on my income) if I used some of my 401K for a downpayment.  I plan on being in this area for another 4-5 years - so a 5/1 ARM doesn't worry me too much.

I welcome your advice!!!

Thank you!

Message Edited by janders9 on 05-20-2007 10:22 PM

[Anonymous]

Downsizing might be better. Taking money out of your 401(k) would cost you in taxes as early distribution penalty.

[Anonymous]

This is just a possible opinion and only to give you another option. I don't know you well enough to say what is best for you which may be different from what is best on paper. If you bought the house, you probably wanted it. It may or may not have been a good decision however it probably was what you wanted. Just going on this, I'm thinking you probably don't want to down size if you can get things under control. You may already be doing this but if not it will buy you more time to make a decision or at least wait for the housing market to come up a bit so you don't take a huge loss. Or even if you do put it up for sale at least you can not be forced in to taking a lower offer because you have run out of money. This part may be more aggravating but a second job may be the short or long term answer. It will increase your current income to be able to afford the house and pay your bills with out digging in to your safety savings. Just an opinion. This is what I would do until I knew what to do.

[Anonymous]

Yeah, you r right. Looking at the housing market, you might not be able to sell quickly. Try to see if refi is a better option, or use the available cash towards paying some of the debt off.

[Anonymous]

You should definately check out Dave Ramsey at www.daveramsey.com and listen to his personal financial advice.

In addition, he has a great website www.mytotalmoneymakeover.com .  I found myself in a similar situation as yours and his ideas have helped greatly!!

Good luck!

[Anonymous]

Would it be possible to bring in a renter to help w/expenses?

[Anonymous]

riteficos wrote:

Downsizing might be better. Taking money out of your 401(k) would cost you in taxes as early distribution penalty.

Taking out a loan against a 401(k) should not result in penalties/taxes, provided there is no default in the loan.  However, you are paying back the loan with after-tax dollars.  Essentially, you borrowed from your own stash of money that has never been taxed but paying it back with money that has been taxed.  When you retire, you'll pay taxes on that money a second time - not a good thing.  It should be the option of last resort. 

The money you are losing in the long run, depending on the amount of the loan, could be substantial.  Until the money is paid back, it cannot be re-invested and you are losing valuable interest. 

I was forced to take out a loan on my 403(b) after the birth of my child and even though the payments are low and over a three year period, I do regret it all the time but sometimes you gotta do what you gotta do.

[Anonymous]

401K loans are usually very low interest and there's no IRS 10% penalty.

[Anonymous]

Thank you for the replies - but I am still feeling very stuck.  I made a huge mistake buying this house - and now I go a little in debt every month.  I have cut back as much as I feel like I can right now (I need the car to get to work - given where I live - and my work pays for internet access and my cell).  Any little thing that goes awry will have to be covered by ccard. 

If I sell this house I will have to sell for the same price I paid (460K) - minus realor fees (I strongly believe I would never sell this house without a realtor's help) - wiping out my equity/down payment.  If I want to buy again I will have to either finance 100% or dip into my 401K.  Loan or early dispersement - they are both bad - but they might be my only option.  The only other thing I can think of is to wipe the slate clean of my debt (minus house) with my 401K and get a 'fresh start'.  

I am feeling very trapped and frustrated.  I make 100K a year - and should be able to live off that!!   The housing prices in this area are crazy.  Even if I downsize, I am looking at around 350-400K.  Anything lower than 350K is either under 500 sq feet or in a really scary neighboorhood - or in very scary shape.

Maybe I am kidding myself - but I am seriously thinking of downsizing and wiping out as much debt as I can with what is left.  I only have 34K in this particular 401K - so after the 20% withholding I could put money down and take out my highest rate credit card. 

Am I crazy?  I just can't live like this - I am not used to being this freaked out about money.   I moved here a year ago - my salary went up 10% and housing costs tripled.

I am going to start the total money makeover - (started) - which recommends selling and renting until I can put at least 20% down.  I am looking for rentals that will take my two cats and a dog - but can't find any.  I just can't let them go - they are my family. 

Any thoughts are welcome -

Thank you.

[Anonymous]

Look into a hardship withdrawal from your 401K. I don't know what the standards are, but my understanding is you can take the money and not get hit by the IRS. Otherwise, look into the 401K loan. Low interest, and no withholding or penalty concerns.

Have you considered renting the house and moving into an apartment? If you can hit a breakeven point with a renter, and rent an apartment, you lower your expenses.

I certainly understand your desire to keep the house. Getting back into one could be even more difficult later. Seattle housing market (where I am) is seeing 8-12 percent growth a year. Salary increases sure ain't that, so I'm hoping to get in a place this year. Otherwise, I expect I'll have to relo in a couple of years.

A BK13 is another possibility. You keep your home, car and 401K. Credit hit, yeah, but in the long run you'll probably come out ahead.

Feel free to PM me. I can point you to a couple of links with some useful reading on the subject.